Analysts recommend holding NiSource stock in 2017

Natural Gas Oven
Gas oven at Cosi in Chicago, IL. Though NiSource does not service Illinois, it provides natural gas to businesses in Indiana, Kentucky, Ohio, Virginia, Pennsylvania, Maryland and Massachusetts through its NIPSCO Gas and Columbia Gas brands. (Hannah Levitt/MEDILL)

By Hannah Levitt

The majority of analysts surveyed by Bloomberg recommend holding NiSource Inc. stock in 2017, expecting a revenue increase to $4.6 billion from $4.52 billion expected in 2016 and a stock price increase to a 12-month target of $23.95 per share from Tuesday’s closing price of $22.25.

Analysts expect steady growth due to favorable regulatory policies for the Merrillville, Ind.-based natural gas distribution and electric generation, transmission and distribution company. NiSource provides natural gas to over 3.4 million customers in seven states and electric services to nearly 500,000 customers in northern Indiana through its Columbia Gas and NIPSCO brands.

Morningstar’s Charles Fishman is among the analysts who currently give NiSource a hold rating. Fishman expects a “simple story” of steady growth and earnings following NiSource’s 2015 spinoff of Columbia Pipeline Group.

“It’s really just how good a job they do managing the regulatory process and how the regulators treat them at this point,” Fishman said. The current regulatory environment is conducive to infrastructure updates and is favorable to utility companies, he said.

He cited interest rates and overall energy markets as factors that could impact the outlook for 2017.

In its third quarter 2016 earnings release in November the company provided 2017 earnings per share guidance of $1.12 to $1.18. Fishman’s 2017 estimate is $1.13, on the lower end of the company’s range. He currently estimates that the fair value of NiSource stock is $21 per share.

NiSource Earnings Per Share
Analysts expect NiSource earnings per share to increase in 2017. (Hannah Levitt//MEDILL)

NiSource reported net income of $242.7 million for the nine months ended Sept. 30, 2016, up 6.9 percent from $227.1 million for the same period in 2015.

According to NiSource’s third-quarter report, its core infrastructure and environmental programs are supported by regulatory initiatives.

The company projects $30 billion in long-term regulated utility infrastructure investments over the next 20 years. Fishman said that about two thirds of this investment is focused on pipe replacement, and he predicts this will work out well for the company.

Just two of the 17 analysts surveyed by Bloomberg suggest selling NiSource stock.

“Shares are trading at roughly 20x our 2017 EPS and yielding 2.8 percent, which we view as near fairly valued and not likely to produce returns above the median of our coverage universe and therefore we reiterate our Underperform rating,” Credit Suisse analyst John Edwards said in a November 2016 note.

Edwards’ rating remains unchanged. He had moved it to underperform from neutral in August, writing that NiSource has attractive qualities but appears expensive as compared to its own history, other utilities and Credit Suisse’s other coverage.

He expects 2017 earnings per share of $1.11 due to more normal weather, slightly below the guidance provided by the company.

Fishman of Morningstar pointed to a 2010 natural gas pipeline explosion in San Bruno, Calif., to explain the current regulatory environment that NiSource is facing. A pipeline rupture led to the explosion, which killed eight people and destroyed 38 homes, according to the American Gas Association. Fishman said this disaster was a wake-up call to the utility industry as a whole.

“I think it was sort of a positive for the industry in the sense that most of the utilities and regulators worked pretty well together to figure out a way of replacing the pipe over the next 20 to 30 years, hopefully before another accident happens,” Fishman said.

Edwards echoed Fishman’s sentiment with regards to regulation. According to his November 2016 note, NiSource “operates in a relatively low risk regulatory environment, and consequently could trade even higher than it does now.”

In a November SEC filing, NiSource cited commodity price risk as one of the risks it faces going forward.

Fishman pointed out that although the NIPSCO brand specifically is more sensitive to the economy, it would benefit from increased manufacturing and industrial activity in northern Indiana.

Referring to President Trump’s “America First” campaign promise, Fishman said, “that really could drive additional usage, which always helps a utility. Even though in the long term you just get a return on your rate base, in the short term having an increased usage does help you.”

NiSource’s fourth quarter and annual reports are due on Feb. 22. Analysts predict 2016 earnings per share of $1.08, up from 63 cents per share in 2015 and in line with the company’s 2016 guidance of $1.05 to $1.10 per share.

Photo at top: Gas oven at a Cosi restaurant. NiSource provides natural gas to businesses in Indiana, Kentucky, Ohio, Virginia, Pennsylvania, Maryland and Massachusetts through its NIPSCO Gas and Columbia Gas brands. (Hannah Levitt/MEDILL)