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Is Atmos Energy (ATO) a Smart Long-Term Investment?

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Aristotle Capital Management, an independent/employee-owned investment management organization, published its “Aristotle Capital Management Value Equity Fund” first quarter 2022 investor letter – a copy of which can be downloaded here. For the first quarter of 2022, Aristotle Capital’s Value Equity Composite posted a total return of -7.19% gross of fees (-7.26% net of fees), underperforming the -0.74% return of the Russell 1000 Value Index and the -4.60% return of the S&P 500 Index. Try to spend some time looking at the fund’s top 5 holdings to be informed about their best picks for 2022.

In its Q1 2022 investor letter, Aristotle Capital Management Value Equity mentioned Atmos Energy Corporation (NYSE:ATO) and explained its insights for the company. Founded in 1906, Atmos Energy Corporation (NYSE:ATO) is a Dallas, Texas-based natural gas distribution company with a $16.1 billion market capitalization. Atmos Energy Corporation (NYSE:ATO) delivered a 10.75% return since the beginning of the year, while its 12-month returns are up by 18.05%. The stock closed at $116.03 per share on May 24, 2022.

Here is what Aristotle Capital Management Value Equity has to say about Atmos Energy Corporation (NYSE:ATO) in its Q1 2022 investor letter: 

"Headquartered in Dallas, Atmos Energy is the largest fully regulated natural gas-only utility in the U.S. It serves over three million distribution customers across eight states, primarily in the South. Approximately 70% of its revenue comes from Texas, where it owns one of the largest natural gas pipeline systems in the state.

High-Quality Business

Some of the quality characteristics we have identified for Atmos Energy include:

-Strong balance sheet and financial strength, perhaps most visible during 2021's winter storm Uri when millions of Texans lost power. The significant spikes in natural gas prices stressed distributors, but Atmos handled over $2 billion of incremental costs with little long-term impact; -Experienced and shareholder-friendly management team, as demonstrated by 38 consecutive years of dividend increases; and -Attractive demographics and favorable regulatory environments in the states where it operates.

Attractive Valuation

Given our estimates of higher normalized earnings and dividend payments, we believe shares of Atmos Energy are trading at a discount relative to our estimate of their intrinsic value.

Compelling Catalysts

Catalysts we have identified for Atmos Energy, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:

-Old pipes and aging infrastructure, coupled with a growing population, have created a large backlog of safety and maintenance projects - completion of which should drive earnings growth and steady dividend increases. Updates should both increase reliability as well as the value of Atmos Energy's assets, enhancing profit levels permitted by regulators; -Well positioned to source low-cost natural gas from prolific basins in Texas to its distribution network, helping to keep customer prices down and economically favorable relative to other sources of energy; and -Advantageous regulatory environment should continue to support rate adjustments so that revenues are earned on capital projects within six to 12 months."

Natural Gas
Natural Gas

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Our calculations show that Atmos Energy Corporation (NYSE:ATO) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Atmos Energy Corporation (NYSE:ATO) was in 16 hedge fund portfolios at the end of the first quarter of 2022, compared to 20 funds in the previous quarter. Atmos Energy Corporation (NYSE:ATO) delivered a 9.19% return in the past 3 months.

In May 2022, we also shared another hedge fund’s views on Atmos Energy Corporation (NYSE:ATO) in 5 Dividend Stocks to Buy for Financial Freedom. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.

Disclosure: None. This article is originally published at Insider Monkey.