A month has gone by since the last earnings report for TransCanada (TRP - Free Report) . Shares have added about 5.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is TransCanada due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
TransCanada Q3 Earnings Beat, Revenue Miss
TransCanada reported third-quarter 2018 comparable earnings of 76 cents per share, comfortably surpassing the Zacks Consensus Estimate of 59 cents. The outperformance primarily stemmed from strength in the company’s expansion projects in U.S. gas pipelines and liquids segments. Further, the bottom line improved from the year-ago figure of 56 cents per share. However, TransCanada’s revenues of C$3,156 million recorded a slight deterioration from the year-ago figure of C$3,195 million.
Nonetheless, the company reported comparable EBITDA of C$2,056 million during the quarter, up from $1,667 million incurred in the year-ago period.
Comparable distributable cash flow in the third quarter was C$1,413 million (C$1.56 per share) compared with C$1,170 million (C$1.34 per share) in the corresponding period of 2017.
Canadian Natural Gas Pipelines: This segment recorded comparable EBITDA of C$522 million, reflecting a decrease of 3% from the year-ago quarter. Lower contribution from Canadian Mainline impacted the results, partly offset by strong performance from NGTL System.
U.S. Natural Gas Pipelines: Comparable EBITDA generated from this segment amounted to C$547 million, up 42% from a year ago. The upside can be attributed to higher contributions from Columbia Gas and Columbia Gulf growth projects. Higher contract sales from the ANR and Great Lake pipeline systems, coupled with improved volumes in its midstream assets drove the impressive results.
Mexico Natural Gas Pipelines: The segment’s comparable EBITDA in the quarter under review came in at C$116 million, higher than C$94 million recorded in the corresponding quarter of the last year on stronger revenues from the pipelines.
Liquids Pipelines: This unit generated comparable EBITDA of C$467 million in the third quarter, improving from the year-ago quarter’s C$303 million. The increase was driven by Grand Rapids, intra-Alberta and Northern Courier pipeline systems, both of which were placed into service in the second half of 2017. Robust volumes on the Keystone pipeline system and significantly stronger contribution from liquids marketing activities added to the positives.
Energy: During the third quarter, the segment reported comparable EBITDA of C$207 million, down 7.5% year over year. The decrease can be attributed to the sale of U.S. Northeast power generation assets last year along with lower contribution from Eastern Power due to the divestment of Ontario solar assets in 2017.
Dividend, Capex and Balance Sheet
The company declared a quarterly dividend of C$0.69 per share, which will be paid on Jan 31, 2019 to shareholders of record as of Dec 31, 2018.
During the three months ended Sep 30, 2018, TransCanada’s capital investments totaled C$2,435 million. As of the same date, the company had cash and cash equivalents of C$1,101 million, and a long-term debt of C$35,029 million. Its debt-to-capitalization ratio was 53.9%.
TransCanada’s current portfolio includes around C$36 billion of accretive growth projects that are likely to be placed into service in the coming years. Notably, these expansionary projects are considerably more than the C$28 billion of projects at the end of the prior quarter. The increase is backed by the sanction of Coastal GasLink Project, final investment decision on the Bruce Power nuclear facility along with securing expansions on its NGTL system. Post regulatory approvals, the construction of its NGTL project is expected to commence in 2020.
TransCanada expects projects worth approximately C$10 billion to come online in early 2019. Apart from these, the company is advancing more than C$20 billion of additional medium-to-longer-term projects, which will boost its future prospects.
While the construction of Keystone XL has been recently halted by US federal judge, the company expects Nebraska Supreme Court to give the final ruling on the pipeline by the first quarter of 2019. The firm expects to fund the projects via asset sales and joint venture capital, among other options of financing.
It aims to fund a considerable portion of its backlog by securing debts at low rates, issuing new equity, joint venture capital and utilizing internally generated cash flow. Notably, these initiatives along with other strategic strides helped the company raise C$9.1 billion last month.
The company is targeting an annual dividend growth of 8-10% till 2021 and expects capital expenditure of C$10 billion for this year.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
Currently, TransCanada has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, TransCanada has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.