WGL Holdings (WGL) trades at a premium to natural gas utilities group despite a lack of earnings growth and a trend from its customer base to reduce spending, leading Christopher B. Muir, Equity Analyst at S&P Capital IQ, to rate the stock a “sell” with a price target of $43.
“If you look just at pure-play natural gas utilities, the average p/e ratio is 16.7, and so they are trading at a slight premium to that. And I don’t think — I think that they should trade at somewhat of a discount to the pure-play side; it is just a fact that I don’t think they are growing quite as quickly,” Muir said.
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Muir says WGL is exposed to government budget cuts through its Washington customers, and the sequester is expected to result in reduced spending in its services. Muir says that, although the company does have investments in nonregulated businesses, they currently are not big enough to offset the negatives.
“The Washington area economy is right now suffering from the sequester cuts, so there are a lot of general contractors that were in the defense industry who have been furloughed, and so I think they are cutting back on spending. They are just looking for ways to save money. As a result, I see households spending less on gas as they try to conserve,” Muir said.