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mid-cap

Time To Book Profits on This Mid-Cap Gas Utilities Stock – SWX

Mar 21, 2022 | Team Kalkine
Time To Book Profits on This Mid-Cap Gas Utilities Stock – SWX

 

Southwest Gas Holdings, Inc.

Southwest Gas Holdings, Inc. (NYSE: SWX) is a utility firm based in the American Southwest specializing in purchasing, distributing, and transporting natural gas. The company's activities are divided into natural gas operations and utility infrastructure services.

Why should Investors Book Profits?

  • Decline in Net Income: SWX recorded a 13.58% decline in consolidated net income to USD 200.78 million in FY21 (ended December 31, 2021) from USD 232.32 million in FY20, due to deterioration in utility infrastructure services.
  • Leveraged Balance Sheet: As of December 31, 2021, the company's debt/equity ratio was 2.15x, compared to the industry median of 1.24x. Furthermore, its long-term debt-to-total-capital ratio was 43.5%, compared to 35.4% for the industry during the same period. As a result, the company's exposure to balance-sheet risk has increased.
  • Continuous increase in Cash Conversion Days: In FY21, the company's cash conversion cycle is 133.9 days, compared to 128 days in FY20. Its cash conversion cycle has been steadily expanding from 87.1 days in FY18 to 133.9 days in FY21, indicating that it takes a more extended period to convert inventories to cash.
  • Industry Lagging Margins: SWX's EBITDA and Net margins have declined year over year. Its EBITDA and net margins in FY21 were 20.1% and 5.6%, respectively, significantly lower than the industry medians of 30.9% and 9.3%.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

SWX's stock price has surged 20.27% in the past month and made a new 52 week high on March 18. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 70.07.

Considering the surge in the share price in a short span, leveraged balance sheet, bottom-line stress, macro headwinds, industry lagging margins, and current valuation, we recommend a "Sell" rating on the stock at the closing price of USD 78.61, up 2.74% as of March 18, 2022.

1-Year Technical Price Chart (as of March 18, 2022). Source: REFINITIV, Analysis by Kalkine Group

 

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.