Shares of electric and gas utility provider DTE Energy Co. (NYSE:DTE) have shown upward momentum over the past year. The stock has climbed by double digits year to date due to rising recessionary concerns in the U.S., pushing it close to its highest levels in nearly a decade. However, all indications suggest the stock has run too far, offering little upside potential at current prices. Therefore, it is best to wait for the anticipated correction before loading up on this reliable income stock.
DTE Energy is a Detroit-based utility, providing electricity and natural gas to upwards of 2 million customers in Michigan. It operates regulated and non-utility businesses, with utility operations accounting for the lion’s share of its business. The remainder of its business shines through the DTE Vantage segment, covering renewable energy and its dynamic Energy Trading division.
It has previously been a favorite among investors for its low volatility and steadily growing dividends, but has become an impressive wealth compounder over the past year. As mentioned, the stock’s momentum has been driven by mounting recession fears and is now nearing overbought territory. With that in mind, let’s delve deeper into the thesis and assess the outlook for DTE moving forward.
DTE Energy recently posted its second-quarter results, which comfortably beat estimates. Revenue soared to an impressive $2.88 billion, reflecting a 7% year-over-year increase while exceeding expectations by $414 million. On the bottom line, GAAP earnings came in strong at $1.55 per share, outperforming estimates by 34 cents.
To put things in perspective, its second-quarter performance stood out as the only positive surprise over the past four quarters, with earnings exceeding expectations. This contrasts with two negative surprises and one in-line result. Additionally, the average surprise was 0.73%, pointing to a mixed performance in recent quarters.
Digging deeper into its quarterly performance, the DTE Electric segment saw a healthy jump in earnings by $101 million to $279 million. This impressive growth was mainly driven by the implementation of new rates and favorable weather conditions.
However, its other segments saw a considerable decline in earnings across the board. For instance, DTE Gas witnessed a steep drop of $12 million due to warmer weather and increased rate base costs. DTE Vantage and Energy Trading also faced their fair share of challenges, with earnings falling by $12 million and $5 million, respectively, due to timing issues, one-time items and weaker performances in its physical gas portfolio.
Story continues
Nonetheless, the company’s projected operating ernings per share of $6.69 at the midpoint for 2024 reflects a stellar 7% increase from last year. Consequently, DTE remains on a healthy growth trajectory, anticipating annual growth to fall in the 6% to 8% range.
DTE Energy has an excellent track record of consistently posting profits, but its leverage issue threatens its financial stability.
From the snapshot above, it is clear that DTE Energy demonstrates healthy profitability, earning a 7 out of 10 rating. Its robust gross margin of 35.28% and operating margin of 18.46% align well with industry standards. Impressively, the company has delivered positive earnings in each of the past 10 years. However, its free cash flow margin of -7.16% puts a damper on the profile, while its robust return on equity at 12.68% and the three-year return on invested capital of 31.22% underscore its strong capital efficiency.
However, the same cannot be said about its financial strength, which is reflected in its low 3 out of 10 rating. Its cash-to-debt ratio is particularly troubling at 0.05, lagging significantly behind industry standards. Further, DTE’s debt-to-equity ratio of 2.09 is alarmingly close to its 10-year high of 2.24, accentuating its heavily leveraged position. Moreover, these concerning numbers, combined with a low Altman Z-Score of 0.92, signal considerable financial distress for the company.
Nevertheless, DTE has consistently paid dividends for the past 27 consecutive years. Currently, it yields a superb 3.30% with an annual payout of $4.08 per share. Moreover, with an impressive five-year dividend growth rate of 4.87%, the company has raised its dividend payout for 14 consecutive years, solidifying its reputation as a dependable income-oriented investment.
Based on its financial results over the past decade, DTE Energy has committed to meeting its dividend obligations. Despite posting negative free cash flow, the company has maintained its streak of paying growing dividends through an effective mix of debt and equity issuance and operational cash flow management. It generated a sizeable $3.20 billion in cash from operations just last year, while issuing over $3 billion in debt. Additionally, since 2019, the company has raised more than $3.58 billion in equity, ensuring the continuity of its lofty dividend payouts.
However, DTE’s financial flexibility remains a concern, especially with it embarking on major business expansion in the coming years. Perhaps the biggest drain on its cash flows is its capital expenditures, which reached a whopping $3.90 billion last year. Additionally, its massive contributions to the Nuclear Decommissioning Trust, totaling $678 million, have further weighed down its cash reserves. Debt repayments, including the $1.60 billion in long-term debt repaid last year, including related interest costs, exacerbate the financial strain.
The financial strain will likely persist, with DTE having earmarked $25 billion for capital investments between 2024 and 2028. A breakdown of its capital expenditures is highlighted in the snapshot from its latest business update deck:
Source: Second-quarter 2024 business update deck
DTE has run red-hot over the past year, exhibiting strong bullish momentum across multiple time frames. Over the past month alone, the stock is up 7%, outperforming the broader market. Additionally, this upward trend continues over six months with a 14.2% increase. Consequently, it is now inching close to its 52-week high price of $126.76.
Over the past decade, we have seen DTE on a steady upward trajectory. Despite a brief dip during the pandemic, the stock rebounded emphatically, underscoring strong market confidence.
Source: Author created based on historical data
Rising recession fears in the U.S. have buoyed the stock lately. The likelihood of a U.S. recession surged to 56% last month, according to MacroMicro data, a substantial jump from just 17.60% a year ago. What’s more surprising is that despite coming up against tough comps from last year, the stock is trading near its 2022 highs. 2022 was a big year for the company, led by substantial rate hikes approved by the Michigan Public Service Commission. These increases included a $30.50 million hike for electricity and $84.10 million for gas, leading to a 38% increase in earnings from continuing operations.
Nonetheless, analysts have a 12-month price target of $127.34 for the stock, representing a 2.84% increase from current prices. However, its GF Value places the stock at $93.80, more in tune with what it should be worth. Additionally, its GF Value is close to its 10-year average price of $97.84.
DTE Energy has enjoyed an impressive run over the past year, mostly driven by rising recession fears boosting demand for safe-haven stocks. However, this momentum has pushed the stock close to its 52-week highs, raising major concerns over its current pricing. While the company’s recent performance, particularly in the second quarter, has been encouraging, its financial flexibility is strained by heavy capital expenditures, which will continue to weigh down its numbers.
Further, despite a 12-month price target of $127.34, DTE’s GF Value suggests the stock is remarkably overvalued, signaling limited upside with a potential correction on the horizon. Given these factors, investors should consider waiting for a more favorable entry point before loading up on shares.
This article first appeared on GuruFocus.
Related News :