Is Northland Power Stock on Sale?

Northland Power stock appears to be on sale for long-term investment. Growth projects and valuation expansion can drive strong gains.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Northland Power (TSX:NPI) is primarily in wind power generation — both offshore and onshore wind — which make up about 70% of its gross generating capacity that stands at over three gigawatts (GW).

The stock has corrected about 28% from its 2022 peak. Like the general stock market, the renewable energy stock experienced valuation contraction from a higher cost of capital, which sparked from rising interest rates last year.

The utility just reported its 2022 results last week. Here are some key highlights.

Northland Power: 2022 results

It’s always great to see sales growth, which can lead to earnings or cash flow growth. In 2022, Northland Power saw sales growth of 17% to $2,449 million. Its gross profit rose at a slightly lower rate of 16% to $2,178 million. Operating income climbed 34% to $1,051 million. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy, climbed 23% to $1,398 million. This growth is also good to see for investors.

The utility’s cash provided by operating activities increased by 14% to $1,833 million. On a per-share basis, cash provided by operating activities climbed by only 5.6%. The per-share metric is weighed primarily from a share count that increased by about 8%.

On the positive side, despite a rising interest rate environment in 2022, the company was able to reduce its interest expense by $23.25 million (almost 10%) versus 2021.

Going forward

The company renewed its at-the-market (ATM) equity program in the third quarter. The program allows Northland to issue up to an additional $750 million of common stock from treasury, which means it won’t dilute the stakes of current common shareholders. Previously, the ATM program raised gross proceeds of $871 million at an average price of $41.27 per share with the proceeds raised intended to fund projects.

Management provided 2023 guidance, estimating adjusted EBITDA in the range of $1.20-$1.30 billion, which would be a decline of just over 10% versus 2022 based on the midpoint. Similarly, its adjusted free cash flow per share and free cash flow per share are expected to fall about 8% and 13%, respectively. This lacklustre guidance is what’s weighing on the stock now.

Valuation

Because Northland Power has demonstrated an erratic earnings history, I use the price to cash flow as its valuation metric. Based on this metric, the stock is fairly valued in the near term. Longer term, assuming growth will resume, the stock is considered to be undervalued and can result in total returns of about 12.2% per year through 2025.

Created with Highcharts 11.4.3Northland Power PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

Yahoo Finance indicates that 15 analysts follow the stock with a 12-month consensus price target of $46.17. This implies a discount of 28% from the recent quotation of $32.90 per share. To be conservative, investors should consider this price target for the year 2025 instead of anticipating a quick bounce in the stock this year.

Investor takeaway

Northland Power’s recent payout ratio was about 31% of earnings and 15% of free cash flow. So, its dividend yield of 3.6% appears to be sustainable.

The shares seem to be discounted for the long term. Additionally, the company has demonstrated its ability to execute projects successfully, growing operating cash flow per share by 22% annually, over the past decade! Lastly, management has identified growth projects through 2030. Therefore, the undervalued stock could deliver respectable returns for the long haul.

Should you invest $1,000 in Northland Power right now?

Before you buy stock in Northland Power, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Northland Power wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »