Today I am outlining why National Grid (LSE: NG) (NYSE: NGG.US) could be considered a terrific stock for growth hunters.
Capex programme boosts growth outlook
I believe that National Grid’s ongoing expenditure plan, designed to improve the state and size of its networks both at home and in the US, should allow it to enjoy splendid long-term growth prospects.
The business has vowed to continue raising the value of its UK regulated asset base at a rate of around 5% per annum, and forked out £2bn in the year concluding March 2014 alone to achieve this. And National Grid spent $2bn to boost its asset base on the other side of the Atlantic.
Rather than throw the cash around willy nilly, National Grid is placing greater emphasis on what it calls ‘value engineering’ to get the most out of such vast outlays. The company is confident that this approach should drive total expenditure lower whilst still increasing the asset base.
And the introduction of new RIIO price controls laid down by OFGEM — which are due to run from next year to 2023 — should force National Grid to stick to these plans. The framework is designed to keep customer bills down by improving operational efficiency by the country’s power operators.
Earnings bounce expected from next year
Due to the effect of near-term expenditure levels, however, City analysts expect the business to rack up a 17% earnings drop in the 12 months concluding March 2015, to 54.9p per share. However, National Grid is anticipated to get earnings moving in the right direction again from next year, when a 5% rise — to 57.6p — is expected.
These projections leave the power play changing hands on a P/E multiple of 16.2 times predicted earnings for fiscal 2015, but which drops to 15.5 — a fraction above the benchmark of 15 which marks out attractive value for money — the following year.
As well, National Grid can also be considered a bargain for investors looking to place their cash in traditional safe-haven utilities stocks — indeed, the wider gas, water and multiutilities sector changes hands on a much higher forward earnings multiple of 19 times.
And critically, National Grid’s vertically-integrated model also makes it immune to the worst of the regulatory wrath facing the country’s major services providers. From Centrica being investigated by the Competition and Markets Authority, through to United Utilities having its price tariff plans thrown back in its face by OFWAT, the earnings outlooks are much cloudier for these businesses.
I believe that National Grid’s asset-stacking scheme — combined with the fruits of tighter cost controls in the UK — should electrify the firm’s growth prospects for coming years.