Spire Inc.: Expensive And With A Lot Of Debt (NYSE:SR)

Spire Co., Ltd. (New York Stock Exchange:SR) is included in the Gas Utilities industry and focuses on both the purchase and sale of natural gas to residential, commercial, and other end users. He has a very long history dating back to 1857. The stock has fallen significantly over the past 12 months, and FWD’s P/E currently sits at around 13. This appears to be due to the company’s difficulty generating consistently strong revenue growth. It incurred a total net loss of $21.6 million in the last quarter alone. Due to the poor performance, SR has revised downward its outlook for FY2023, which I believe has contributed to the stock price deterioration over the past few months.

Risks include high levels of debt to fuel growth, which seems risky at the moment. Interest rates are rising rapidly. Interest expense has increased significantly over the past 12 months to $171 million and is likely to continue rising for some time, limiting earnings potential and ultimately The rating will remain unchanged.

Market overview

of cost As the industry becomes increasingly difficult to navigate, calls for SR are increasing. As mentioned earlier, SR belongs to the gas utility industry and primarily focuses on selling natural gas to customers. The company consists of two distinct segments: gas business and gas marketing. The company also owns and transports propane pipelines.

I think one of the keynotes about SR right now is that they’re taking on a lot of debt for further growth and financing. expansion For the company. The market in which the company operates is subject to various influences, including severe weather conditions. Capital expenditures so far in 2023 totaled $483 million, and gas public spending increased by 12.5%. This includes strong infrastructure investments by the company as it seeks to efficiently build its equity in the market over the next few years. However, the goal for 2023 is still $700 million in capital expenditures. However, from a long-term perspective, the company is expected to make capital investments of $7 billion over 10 years. I think this kind of confidence in their ability to grow efficiently over the next few years is remarkable and at least a reason for some optimism. But what I want is for them to be less reliant on debt to fund their future. This may ultimately hurt them, as they will need more FCF to service debt, reducing shareholder compensation. Of course, SR has the potential to grow much more than taking on debt, and the bet is that that won’t be a problem, but market conditions aren’t very favorable at the moment, resulting in the company posting a net profit. So I’m still skeptical. loss.

Looking at the outlook provided by the company, it appears that the company is at least reaffirming its LT growth expectations, but slightly lowering its FY2023 NEEPS target range by $5 million to $4.15 to $4.25. Probably not that much compared to the company generating his TTM net income of over $200 million. Nevertheless, I think that deteriorating teaching is never a good thing. On the financing part of the business, we don’t expect to need any further capital until 2024, which is at least a slight positive. However, SR’s net debt/EBITDA ratio is still 4.99 at the moment. This is well above my threshold of 3. This indicates that the company has taken on a large amount of debt to fund its growth, but it also seems to lack the ability to repay it, given that EBITDA is too low at the moment. . What concerns me even more is that the company is unable to buy back shares, relying instead on stock dilution. In my opinion, this introduces further risk to the investment thesis and leads to my Hold rating.

risk

Debt as a financial tool allows companies to fund growth initiatives, acquire assets, and exploit opportunities without diluting the ownership of existing shareholders. It can also be a cost-effective way to take advantage of favorable borrowing terms, especially in a low interest rate environment.

However, an increase in our debt burden may result in additional financial obligations, such as interest payments and debt service costs. This increased level of financial leverage means that Spire has an increased responsibility to effectively manage its debt and maintain a strong balance sheet. For SR, that’s exactly what has happened in recent months, with interest expense increasing very quickly to $171 million over the last 12 months. Interest rates haven’t been the same over this period, so I think it’s likely that they’ll probably increase further. If you look at the Fed’s policy, I think interest rates will remain high for quite some time in order to bring inflation down to target. For SR, this could mean interest expense of at least $200 million or more. Considering the company even lowered its 2023 EPS outlook, it’s fair to say it’s starting to feel the effects of rising interest rates now. As long as interest rates remain fairly high, I think SR’s stock price will be suppressed and continue its downward trend.

last pointer

SR may be investing heavily in its business to fuel expansion, but at this point it simply lacks the ability to buy back its own shares and pay down its debt ‘naturally’ through profits and FCF. It seems so. We are concerned about the high net debt/EBITDA ratio. In addition, his earnings multiple is not low at nearly 14 times. It may be slightly below the industry average, but high debt could be the reason for the discount.

We believe that debt will weigh on the stock price in the medium term, and we believe there is a possibility of dilution, so the valuation based on earnings will fall to the range of 11-12 times, indicating a further decline in the stock price. I don’t think I can make a buying decision until then. 10-15% from here. But I like the dividend yield, and that’s what causes me to rate it a Hold, at least for now, rather than a Sell.