Is Hydro One stock a buy?

These days, there aren’t many charts out there with a straight line from the bottom-left to the top-right, but Canadian electric transmission & distribution company Hydro One (Hydro One Stock Quote, Charts, News, Analysts, Financials TSX:H) definitely has that shape, now over the past five years running. 

But those steady share gains may have been a bit too much, too fast, judging by the latest take from iA Capital Markets analyst Matthew Weekes, who reviewed Hydro One’s first quarter financials in a Monday update. Weekes maintained both a “Hold” rating and $38.00 target price, which at press time translated to a projected one-year return including distribution of negative one per cent.

Hydro One, Ontario’s largest electricity transmission and distribution provider, announced its first quarter 2023 financials on May 5, featuring basic earnings per share of $0.47, which was down 9.6 per cent year-over-year. Hydro One said the drop was due to a number of issues, including higher operation, maintenance and administrative (OM&A) costs, higher financing charges and higher depreciation, amortization and asset removal costs.

Revenue for the quarter was up slightly to $2,074 million compared to $2,047 a year earlier and net cash from operating activities was down from $443 million to $350 million.

Hydro One said it made $499 million in capital investments over the quarter and placed $237 million of new assets in service.

“Hydro One continues to invest in the reliability and performance of Ontario’s electricity transmission and distribution systems by addressing aging power system infrastructure, facilitating connectivity to new load customers and generation sources, and improving service to customers,” the company said in a statement.

Weekes said the $0.47 in EPS was in-line with his and the consensus estimates at $0.47 and $0.49 per share, respectively, while adjusted EBITDA at $736 million was also in-line with his call at $734 million while being under the Street’s call at $748 million.

On the broadband side, Weekes said Hydro One has made investments in human capital, supply chains and materials in its support of broadband connectivity requirements in Ontario, with the company estimating $0.5-$1.0 billion in potential revenue for an incremental addition of about 0.5 per cent to earnings growth. Aside from that broadband addition, management reiterated its outlook of five to seven per cent EPS growth through 2027.

“H is anticipating a ramp up for orders from service providers later this year and will provide guidance once enough orders are received for quantifying the impact,” Weekes said.

Weekes adjusted his forecast and is now estimating Hydro One’s full 2023 and 2024 adjusted EBITDA at $2,819 million (previously $2,780 million) and $2,980 million (previously $2,943 million), respectively. On earnings, the call is for $1.70 per share in 2023 (previously $1.71) and $1.84 per share in 2024 (previously $1.86).

“H has strong characteristics, including a) stable earnings and dividend growth from a high-quality, rate-regulated electric T&D asset base, (b) a strong outlook underpinned by incremental medium-term opportunities, and long-term system requirements to support economic growth, decarbonization, and system reliability in Ontario, and (c) strong credit a payout metrics. However, we are maintaining our $38.00 target price and Hold rating based on valuation,” Weekes wrote.