Why Capital Power Corp. Fell 2.35% on Wednesday

Capital Power Corp.’s (TSX:CPX) stock fell 2.35% on Wednesday following its Q3 earnings release. Should you buy on the dip? Let’s find out.

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Capital Power Corp. (TSX:CPX), one of North America’s largest independent power producers, announced its third-quarter earnings results on Wednesday morning, and its stock responded by falling 2.35% in the day’s trading session. Let’s break down the quarterly results and the fundamentals of its stock to determine if we should consider using this weakness as a long-term buying opportunity or wait for an even better entry point in the trading sessions ahead.

The results that ignited the sell-off 

Here’s a quick breakdown of eight of the most notable financial statistics from Capital Power’s three-month period ended on September 30, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Revenues and other income $346 million $374 million (7.5%)
Adjusted EBITDA $158 million $148 million 6.8%
Normalized earnings attributable to shareholders $29 million $30 million (3.3%)
Normalized earnings per share (EPS) $0.28 $0.31 (9.7%)
Net operating cash flow $120 million $105 million 14.3%
Adjusted funds from operations $134 million $79 million 69.6%
Electricity generation (Gigawatt hours) 4,725 3,930 20.2%
Generation facility availability 97% 96% 100 basis points

What should you do with Capital Power’s stock now?

Even though Capital Power’s third-quarter results were “in line with management’s expectations,” it was a fairly weak quarter overall, so I think the 2.35% decline in its stock was warranted. That being said, I think the decline has resulted in a very attractive entry point for long-term investors for two fundamental reasons.

First, it’s undervalued. Capital Power’s stock now trades at just 17.8 times fiscal 2017’s estimated EPS of $1.38 and only 16.6 times fiscal 2018’s estimated EPS of $1.48, both of which are very inexpensive compared with its five-year average multiple of 29.2; these multiples are also inexpensive given its long-term earnings-growth potential.

Second, it has one of the best dividends in the industry. Capital Power pays a quarterly dividend of $0.4175 per share, equal to $1.67 per share annually, which gives it a juicy 6.8% yield. It’s also important to note that the company’s recent dividend hikes, including its 7.1% hike in July, have it on track for 2017 to mark the fourth straight year in which it has raised its annual dividend payment, and that it has a dividend-growth program in place that calls for annual growth of approximately 7% through 2020, making it both a high-yield and dividend-growth play.

With all of the information provided above in mind, I think all Foolish investors should consider initiating positions in Capital Power today with the intention of adding to those positions on any further weakness in the weeks ahead.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in the companies mentioned.

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