Beware the old standby
MGE Energy, Inc. (NASDAQ:MGEE) has been operating in one form or another since 1888, so it’s definitely seen some bad times. The company also has a division, MAGAEL, devoted to holding property so that the business can expand. Any company with an eye to the future has a leg up over companies that are obsessed with the current quarter. With 140,000 power and 145,000 natural gas customers, MGE Energy, Inc. (NASDAQ:MGEE) has a solid foothold in Wisconsin.
One small issue, however, is the extreme dependence on the Wisconsin economy that MGE Energy, Inc. (NASDAQ:MGEE) carries. While utilities tend to be fairly solid due to monopoly status and steady demand, one natural disaster could spell a lot of trouble for MGE. I believe this is largely counterbalanced by the 12% profit margins the company produces and the fact that it’s trading for around 18 times earnings, which is one of the less expensive companies in the sector. Unfortunately, I do not see MGE Energy, Inc. (NASDAQ:MGEE) beginning a phase of dramatic growth even by utility standards.
The market doesn’t see everything
PNM Resources Inc (NYSE:PNM) is unusual in that it serves two of the major power grids in the country – part of the one in the western part of the U.S., in New Mexico, and part of the Texas grid. As a company that has operated in some form since 1917, PNM Resources Inc (NYSE:PNM) holds a wider base of operations than the market has acknowledged so far. In fact, the company is trading for little more than book value.
While the 7.4% profit margins and the fact that the company is trading for more than 18 times earnings aren’t indicators of great growth potential, the growth of many economies in Texas’s major cities and the company’s book value are great signs. Simply put, the market hasn’t caught on to how much infrastructure and potential PNM Resources Inc (NYSE:PNM) has, leading to a lower valuation than it deserves. I believe PNM Resources Inc (NYSE:PNM) has the potential to expand considerably and grow its share price at least as much given its markets and its current valuation.
Diversification can be done well or poorly
Avista Corp (NYSE:AVA) is a company that has a strong cash flowing business with 359,000 power and 320,000 natural gas customers across the western US. That’s a solid backing for more speculative work such as Ecova, which is leading the charge to make sites more environmentally friendly and sustainable. With 600,000 sites and more than 700 customers to its credit as of this writing, Ecova is the great potential Avista Corp (NYSE:AVA) has for dramatic growth. While utilities aren’t usually known for being growth monsters, consultancies dealing in a major field have extraordinary potential to expand.
This potential for growth is particularly the case as environmental regulations become more stringent. With tighter laws and more requirements for companies to follow, Avista Corp (NYSE:AVA)’s Ecova subsidiary may eventually be spun off as a sizable business in its own right. If this happens, expect existing Ecova shareholders to receive shares that could grow handily. This may never happen, but Avista Corp (NYSE:AVA) has a solid backing with its utility business — having operated since 1889, it probably isn’t going to stop any time soon.
Putting It Together
There are a lot of things that can power growth. A company can take a calculated risk on something unproven. Another company may simply be unpopular or have gone unnoticed by the market at large. Even a simple company that’s churning out cash can be a rocket. Just look for a great company and wait until it feels like a good deal and you’ve got a solid chance.
The article Small-Cap Utilities: Rockets or Bombs? originally appeared on Fool.com and is written by Chris Hodge.
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