Southwest Gas (SWX) Rides on Investments, Expanding Customer Base
Southwest Gas Holdings Inc’s SWX strategic investments and plans to separate Centuri in order to become a fully regulated natural gas business, are likely to boost its future earnings. The company’s consistent customer additions to its Natural Gas segment will further improve its performance.
However, this Zacks Rank #3 (Hold) company’s dependence on interstate pipeline transportation to meet customer demands acts as a headwind.
Tailwinds
Southwest Gas’ strategically plans its investment to meet the growing demand for safe, reliable and affordable energy solutions. The company expects capital investment of $2 billion during 2023-2025. In second-quarter 2023, the company had capital investments of $381 million. The capital expenditure guidance for its Natural Gas Distribution segment was increased to $700-$720 million from $665-$685 million to support customer growth, system improvements and pipe replacement programs.
The company’s natural gas operations have a diversified and growing customer base in the three states, namely Arizona, Nevada and California. Over the last 12 months, SWX added nearly 42,000. The ongoing increase in customer base will drive demand and performance of the company.
The spinoff of Centuri from Southwest Gas will further improve capital allocation opportunities, reduce future equity financing needs of the company and provide strategic flexibility to lead to the energy transition to reduce transportation emissions. The separation is expected to occur during the fourth quarter of 2023 or the first quarter of 2024.
Headwinds
Southwest Gas depends on interstate pipelines’ transportation capacity, which if unavailable, could impact its ability to meet customers’ requirements. A prolonged interruption or reduction of interstate pipeline services during the peak demand seasons could reduce SWX’s cash flow and earnings.
SWX does not own any significant asset other than the stock of operating subsidiaries, thus making it dependent on its units to meet its financial needs. Also, the company’s ability to pay dividends depends on its units’ net income and cash flows.
Stocks to Consider
Some better-ranked stocks for investors interested in the same sector are Atmos Energy Corp. ATO, American States Water AWR and FirstEnergy Corporation FE, each holding a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ATO’s long-term (three to five years) earnings growth rate is 7.25%. It delivered an average earnings surprise of 2.4% in the previous four quarters.
AWR’s long-term earnings growth rate is 6.3%. The Zacks Consensus Estimate for AWR’s 2023 EPS (earnings per share) indicates an improvement of 29.8% from the previous year’s reported actual.
FE’s long-term earnings growth rate is 6.45%. The Zacks Consensus Estimate for FE’s 2023 EPS indicates an improvement of 5% from the previous year’s reported actual.
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