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Another Chance to
Buy MDU Resources
 

Both of Roger Conrad’s, Editor, Conrad’s Utility Investor, Focus stocks are former high flyers that have come back to good entry points: Avangrid Inc (NYSE: AGR) and MDU Resources (NYSE: MDU). Here are Conrad’s comments for MDU Resources:

“Earlier this year, Aggressive Holding MDU Resources (NYSE: MDU) briefly slipped under our buy target: An overblown response to concern about company guidance, coupled with a general selloff in utilities and energy stocks.

Unwarranted concerns about interest rates are a likely catalyst for the stock’s slide since early September. The upshot for value hunters, however, is the same as they were back in February. Simply, it’s another great opportunity to buy this well-run, low-leveraged, diversified utility company.

MDU Resources is basically two businesses in one. The company’s 8-state regulated electric and natural gas utilities and pipelines serve a region stretching from the once again booming Bakken to the Pacific coast. Its construction materials and services arm is national, rapidly growing and uniquely positioned to benefit from increased infrastructure spending in the next couple years.

Odds of the US government playing a big role in that effort would likely increase considerably if Democrats take control of the US House of Representatives in November, as voter polls indicate likely. But with MDU’s construction services backlog up 49 percent over the past year to a new record high, it’s by no means required for success. Customers now include burgeoning high tech firms as well as the healthcare industry.

Because construction is cyclical in nature, MDU’s management has historically built its dividend and balance sheet strength on its utility and pipeline business alone, where revenues are more recession resistant. The utilities operate in one of the most economically vibrant areas of the country in the Dakotas and upper Rocky Mountain states.

Over the next five years, management expects to increase its customer base between 1 and 2 percent annually, resulting in 6 percent compound growth in rate base. One large project, the Thunder Spirit Wind Farm, will start adding to earnings in the fourth quarter as it comes on stream. And regulators are supportive in all jurisdictions, ensuring a fair return on investment.

As for the balance sheet, the superior BBB+ ratings from S&P and Fitch flow from exceptionally strong debt metrics. That includes the fact that MDU has only $35 million in total debt maturities through 2026 and generated over $100 million in free cash flow last year. And it means the company has flexibility to make strategic acquisitions without worrying about capital markets, such as the accretive purchase of concrete materials company Sweetman this month.

Ultimately, MDU’s strong businesses and low market capitalization of barely $5 billion make it a takeover likely. In the meantime, its a buy at 26 or lower.”

Editor’s Note: Conrad’s Utility Investor delivers high-quality analysis and rational assessment of the best dividend-paying utilities, MLPs and dividend-paying Canadian energy names, www.ConradsUtilityInvestor.com.


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