Strong Outlook, Pullback On Shares Lead Janney To Upgrade RGC Resources

RGC Resources Inc. (NASDAQ: RGCO) reported fiscal 2018 first-quarter results Monday that were hurt by charges tied to U.S. tax legislation. 

The Analyst

Janney analyst Michael Gaugler upgraded RGC Resources from Neutral to Buy and lowered the fair value estimate from $29 to $27.

The Thesis

If not for the tax-related charges. RGC Resources' earnings would have exceeded estimates, Gaugler said in a Tuesday note. (See the analyst's track record here.) 

The uptick in the interest rate on the 10-year treasury note from a recent low of 2.06 percent in September to 2.85 percent Friday has severely impacted utilities, the analyst said. 

"Additional anticipated higher U.S. Treasury borrowing will likely pressure rates for the foreseeable future, making it difficult to forecast where 10-year rates will ultimately top out," he said. 

Long-term earnings growth through increased capital spending allows utilities to raise dividends over time — offsetting the negative impact of rising rates somewhat, Gaugler said. 

RGC Resources has "ample" room to raise dividends and has a track record of doing so, the analyst said. 

The pausing of the Mountain Valley Pipeline construction at a federal judge's direction may also have contributed to a pullback in RGC stock, Gaugler said. 

The headwinds pushing against RGC Resource's share price appear to be manageable over time, the analyst said. Janney expects RGC's robust capex to drive strong earnings growth and therefore dividends.

"With the shares trading approximately 30-percent off their recent highs, we believe this is a good entrance point for patient investors looking for long-term growth and income." 

Price Action

The shares of RGC Resources are up about 5 percent over the past year.

Shares were up 7.47 percent at $24.02 at the time of publication Tuesday afternoon. 

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