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Beware of shock if you hold Sempra stock

Tuesday, July 15th, 2014

Despite the market decline last week, there was some great economic news that was positive for long-term investors.

First, jobless claims came in at 304,000, which was well below last week’s 315,000. I believe that we could see jobless claims fall below 300,000 in weeks ahead. What I base that on is a very positive JOLTS -- Job Openings and Labor Turnover Survey -- report. The survey was very positive, coming in with 4.635 million job openings on the last day of May. This was the highest number of job openings for any other month in the past seven years.

The month of April came in at 4.46 million job openings. What is important to me is the quit rate was 1.8 percent, which is higher than the discharge and layoff rate of 1.1 percent. What this tells me is employees feel positive about the job market and will quit their job feeling confident they will finding another.

Based on this survey, I would not be surprised in future months to see job creation rise above 300,000.

I have received some calls on my radio show about how well utility companies are performing. One name that keeps coming up is Sempra Energy (NYSE: SRE). The company is based in San Diego and employs more than 17,000 people. The 52-week high on the stock is $105.25 and a 52-week low is $81.77; currently, the stock hovers just above $100 per share. Sempra is a utility company but also owns gas pipelines and has projects in wind and solar power in many states.

Valuation ratios are high in the utility industry. The current price-earnings ratio for Sempra is 23.88, above the industry average of 20.2; both of these are rather high. Price to sales for the company is 2.3, which is substantially higher than the industry average of 1.6.

Price to book value also favors the industry average, coming in at 1.9, which is less than the company’s price to book value of 2.6. Price to cash flow again favors the industry at 6.7; Sempra’s is 2.6.

People usually invest in utility companies for the dividends yield. The industry average dividend is 3.7 percent while Sempra’s dividend yield is only 2.6 percent. The company uses only 58 percent of its earnings to pay that dividend, which is below the industry average of 71.6, so it is possible that the company could raise its dividend.

Sales growth for the company and the industry is the same at 8 percent year over year for the last 12 months. Earnings-per-share growth, however, favors the company with a 32.1 percent increase over year for the last 12 months, while the industry growth was only 11.7 percent.

The financial strength of a company is always an important factor. When investing in utility companies, the debt to equity will be higher. The industry average total debt to total equity is 114.3, which is slightly less than the company debt to equity of 116.5.

If I owned this company, I would watch the debt levels to see whether they are increasing or management is trying to reduce its debt.

I was a little disappointed to see the return on equity of 10 percent; however, that is better than the industry average of 8.2 percent. I generally like to see a return on equity of at least 12 percent, but closer to 15 percent makes me feel better.

Sempra Energy does have a nice net profit margin of 10.7 percent, which is nearly 30 percent higher than the industry average of 7.8 percent.

The receivable turnover, which is an important efficiency ratio, is 6.8 for the company -- below the industry average of 8.4. The receivable turnover tells how many times the receivables have turned over the last 12 months. Also an important factor is inventory turnover for the last 12 months; here the company looks very good with a showing of inventory turning over 31 times for the last 12 months, while the industry came in at 4.8 times.

Looking forward to the year ending Dec. 31, 2015, the mean of 18 analysts are looking for the company to earn $4.85. This is up from $4.48 for the year ending December 2014, which would be an 8.3 percent increase in earnings per share. If I use the 40-year historical average forward PE of 16.5, the target sell price would be $80 per share.

Based on a current stock price of about $102 and the December 2015 earnings per share of $4.85, investors need to understand they are paying 21 times forward earnings for a utility company.

In addition to the high for PE, the company has a peg ratio of 3.26. This also shows that investors are paying a high amount the future growth of this utility company.

While I can’t tell you where the top for this company is, I can tell you based on history that when companies trade at high multiples such as this one trading at 21 times earnings, investors could be in for some disappointment. So if you hold this company in your portfolio, be careful.

It is also worth noting that utility companies generally do not do well in a rising interest rate environment. If you have been watching the news, reading my columns, listening to my radio show or seeing my daily post you know that it is not will interest rates rise, it is when they will rise. There has been much talk that we could see interest rates rise at the end of 2014 or early 2015.

So again, investors of Sempra Energy: Be careful.

Do you have a question or a company you would like us to take a look at?
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