On Feb 7, 2013, we downgraded energy services holding company AGL Resources Inc. (GAS) to Underperform from Neutral, considering its weak fundamentals and tepid outlook. The disappointing fourth quarter results and a number of other challenges have added to this bearishness, which is supported by a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
AGL Resources recently reported lower-than-expected EPS for the December quarter – 91 cents versus the Zacks Consensus Estimate of $1.01 – affected by higher operating expenses.
We expect shareholder sentiment toward the company to remain lukewarm, considering its investment in higher-risk unregulated operations and the uncertain economic environment.
Causes for Concern
The outlook for AGL Resources’ wholesale segment continues to be less than favorable. We believe that margins in this unit will be under pressure, based on narrow spreads for transportation and storage.
During the next few quarters, AGL Resources’ shipping segment results may also remain weak. The absence of a strong economic recovery in the U.S. continues to have a negative impact on tourism and the economies in Tropical Shipping’s service territories (particularly in the Bahamas and the Caribbean).
Natural gas distribution is usually a temperature-sensitive business with about half of all deliveries used for space heating. Usually, almost 75% of the deliveries and sales occur during the six-month period of October through March. Consequently, milder-than-normal weather conditions in the future could adversely effect AGL Resources’ operating results, cash flow and financial condition.
Stocks That Warrant a Look
While we expect AGL Resources to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Atmos Energy Corp. (ATO), Centrica plc (CPYYY) and Clean Energy Fuels Corp. (CLNE) as good buying opportunities. These natural gas distributors – sporting a Zacks Rank #2 (Buy) – have solid secular growth stories with potential to rise from current levels.
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