When National Grid plc (LSE:NG.) released its most recent earnings update (30 September 2017), I compared it against two factor: its historical earnings track record, and the performance of its industry peers on average. Understanding how National Grid performed requires a benchmark rather than trying to assess a standalone number at one point in time. Below is a quick commentary on how I see NG. has performed. Check out our latest analysis for National Grid
Commentary On NG.’s Past Performance
I like to use data from the most recent 12 months, which annualizes the most recent half-year data, or in some cases, the latest annual report is already the most recent financial year data. This enables me to assess different companies on a similar basis, using the latest information. For National Grid, its most recent earnings (trailing twelve month) is UK£1.67B, which, relative to last year’s figure, has plunged by -0.95%. Since these values may be relatively nearsighted, I have determined an annualized five-year figure for National Grid’s net income, which stands at UK£2.07B This shows that National Grid’s average annual net income has historically been bigger, which implies a downward trend in profitability.
To understand what’s happening, let’s take a look at what’s going on with margins and whether the whole industry is feeling the heat. Revenue growth in the last couple of years, has been positive, yet earnings growth has been deteriorating. This suggest that National Grid has been ramping up expenses, which is harming margins and earnings, and is not a sustainable practice. Inspecting growth from a sector-level, the UK integrated utilities industry has been enduring some headwinds in the prior year, leading to average earnings dropping by more than half. This is a a substantial change, given that the industry has been delivering a relatively flat growth rate over the previous couple of years. This means whatever near-term headwind the industry is experiencing, the impact on National Grid has been softer relative to its peers.
What does this mean?
National Grid’s track record can be a valuable insight into its earnings performance, but it certainly doesn’t tell the whole story. Usually companies that experience an extended period of decline in earnings are undergoing some sort of reinvestment phase Though if the whole industry is struggling to grow over time, it may be a signal of a structural change, which makes National Grid and its peers a higher risk investment. I recommend you continue to research National Grid to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for NG.’s future growth? Take a look at our free research report of analyst consensus for NG.’s outlook.
- 2. Financial Health: Is NG.’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 September 2017. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.