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NJR or SWX: Which Utility Gas Distribution Should You Buy?

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The novel coronavirus outbreak significantly impacted the demand for natural gas in the United States. The restrictions and lockdown owing to COVID-19 have lowered the demand for natural gas from industrial and commercial consumer groups. Per a report from the U.S. Energy Information Administration, natural gas consumption in the United States will drop 3.9% in 2020 to 81.69 billion cubic feet per day.

The first half of 2020 does not paint a positive picture for gas distribution utilities and the demand for natural gas is set to drop further due to reduction in economic activities. However, as we move toward the second half of 2020, the gradual lifting of lockdown, and opening of offices and factories keeping in mind social distancing norms will gradually increase the demand for natural gas. Winter demand for space heating from the residential group will also boost the demand for natural gas.

Natural gas’ clean burning nature, favorable prices compared with other fuels and wide availability make it a preferred choice of energy sources. At present, more than 3 million miles of transmission and distribution pipeline network supplies natural gas to millions of consumers in the United States. The near-zero interest rates will create opportunity for the companies in this capital-intensive industry to source funds to expand the existing infrastructure, and continue upgrading and replacing old pipelines to increase the reliability of their services.

In this article, we run a comparative analysis on two Zacks Utility - Gas Distribution companies — New Jersey Resources Corporation (NJR - Free Report) and Southwest Gas Holdings, Inc. (SWX - Free Report) — to find out which is a better investment option at the moment.

Both the stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The market capitalization of Southwest Gas Holdings is $4.13 billion, while that of New Jersey Resources is $3.29 billion.

Growth Projections

The Zacks Consensus Estimate for New Jersey Resources’ fiscal 2020 earnings and revenues is pegged at $2.10 per share and $2.23 billion, respectively. This suggests a 7.69% increase in the bottom line but a 14.12% decline in the top line from the year-ago reported figures.

The Zacks Consensus Estimate for Southwest Gas Holdings’ 2020 earnings per share and revenues is pegged at $3.74 and $3.28 billion, respectively. This indicates a 5.08% decline in the bottom line but a 5.09% increase in the top line from the year-ago reported figures.

Price Performance

Shares of most of the industry players are currently declining due to unprecedented economic crisis led by the novel coronavirus outbreak. In the past three months, Southwest Gas Holdings’ shares have gained 8.5% against the industry's decline of 18.6%. Shares of New Jersey Resources have lost 7.9% in the same time frame.

Price performance (Three months)

Debt to Capital

The debt to capital is a good indicator of a company’s financial position. The indicator shows how much debt is used to run a business. Given the economic turmoil, every company is trying their best to preserve liquidity and increase chances of meeting debt obligations. New Jersey Resources and Southwest Gas Holdings have a debt to capital of 52.23% and 50.86%, respectively, compared with the industry’s 59.31%.

Dividend Yield

Utility companies have the ability to pay regular dividends to shareholders due to their stable earnings and steady demand for the services offered to customers. Currently, the dividend yield for New Jersey Resources is 3.72%, while the same for Southwest Gas Holdings is 3.11%. Both the company’s dividend yield is better than the Zacks S&P 500 composite’s 2.11%.

Earnings Surprise Trend & Long-Term Growth

New Jersey Resources delivered average negative surprise of 33% in the last two quarters. Its long-term (three to five years) earnings growth is projected at 6%.

Southwest Gas Holdings delivered average positive surprise of 9.5% in the last two quarters. Its long-term earnings growth is estimated at 6%.

Our Pick

Both the companies are efficiently providing services to thousands of customers in their service territories. We resort to our proprietary Zacks Style Score for determining which stock is a better pick right now. Stocks with a VGM Score of A or B and a Zacks Rank #1 or 2 have a high probability of generating higher returns than peers. Southwest Gas Holdings has a VGM Score of B and New Jersey Resources has a VGM Score of C . Thus, we believe that Southwest Gas is a better investment option now.

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