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Should You Buy Shares of Southwest Gas After It Reached a Settlement with Carl Icahn?

Utility company Southwest Gas (SWX) recently reached a settlement with billionaire investor Carl Icahn, ending a months-long dispute. However, considering its weak bottom line and lean profit margins, is the stock a buy now? Read on to learn what we think.

Natural gas distributor and transporter Southwest Gas Holdings, Inc. (SWX) in Las Vegas, operates through the three broad segments of Natural Gas Distribution; Utility Infrastructure Services; and Pipeline and Storage. SWX also offers trenching, installation, replacement of underground pipes, and the repair of energy distribution systems.

The company reached a settlement earlier this month with Carl Icahn, ending a months-long battle over the company’s planned purchase of Questar Pipelines for approximately $2 billion against Icahn’s wishes. The settlement replaces SWX’s chief executive and hands as many as four board seats to the billionaire investor. SWX promoted Karen Haller to the post of President and CEO after former CEO John Hester was ousted.

Over the past year, SWX’s stock has gained 30.5% in price and 30.1% year-to-date to close Friday’s trading session at $91.16. It has gained 9.2% over the past month. However, the stock has declined marginally intraday.

Here are the factors that could affect SWX’s performance in the near term:

Bleak Bottom Line

For its fiscal first quarter, ended March 31, 2022, SWX’s consolidated operating revenues increased 43.1% year-over-year to $1.27 billion. However, its adjusted net income decreased 9.4% from the prior-year period to $106.20 million, while its adjusted EPS came in at $1.74, down 14.3% from the same period the prior year.

Lean Profit Margins

SWX’s trailing 12-months gross profit margin, EBITDA margin, and net income margin of 21.71%, 19.37%, and 4.42%, respectively, are 47.34%, 41.83%, and 57.66% lower than their 41.23%, 33.29%, and 10.45%industry averages.

Its trailing 12-month 5.74%, 3.02%, and 1.36% respective ROE, ROTC, and ROA are 35.10%, 21.64%, and 43.47% lower than their 8.84%, 3.85%, and 2.40% respective industry averages.

Bleak Growth

SWX’s net income has declined at a 3.2% CAGR over the past three years, while its EPS has decreased at an 8.4% CAGR over the same period. Its tangible book value has declined at a 4.7% CAGR  over the past three years. Moreover, SWX has missed consensus EPS estimates in each of the trailing four quarters.

POWR Ratings Reflect Bleak Prospects

SWX’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. The stock has a Sentiment grade of D. This is justified because  Wall Street analysts’ 12-month median price target of $72.39 indicates a 20.6% potential downside.

In the 64-stock Utilities – Domestic industry, SWX is ranked #61. The industry is rated D.

Click here to see the additional POWR Ratings for SWX (Growth, Value, Momentum, Stability, and Quality).

View all the top stocks in the Utilities – Domestic industry here.

Bottom Line

The end of a lengthy battle with Icahn might benefit the company and allow it more room to focus on its operational development. However, its bleak bottom-line growth in the past quarter and lean ROE are concerning. Therefore, I think the stock might be best avoided now.

How Does Southwest Gas Holdings, Inc. (SWX) Stack Up Against its Peers?

While SWX has an overall POWR Rating of D, one might consider looking at its industry peers, Otter Tail Corporation (OTTR) and Hawaiian Electric Industries, Inc. (HE), which have an overall B (Buy) rating.

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SWX shares were trading at $91.06 per share on Monday afternoon, down $0.10 (-0.11%). Year-to-date, SWX has gained 32.05%, versus a -14.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.


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