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UGI Benefits From Investments Amid Higher Interest Rate Risk

UGI Corporation UGI has been gaining from systematic investments to modernize and replace the aging infrastructure. Strategic acquisitions that are accretive to earnings, efficient debt management and the expansion of its customer base are likely to drive its performance over the long run. However, its exposure to the higher interest risk remains a concern.

UGI currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for third-quarter fiscal 2022 earnings per share of UGI indicates an improvement of 24.7% over the prior-year quarter’s figure.

The company’s long-term (three to five years) earnings growth rate is currently pegged at 8%. Moreover, UGI’s current dividend yield of 3.9% is better than the industry average of 2.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tailwinds

UGI continues to expand its customer base and added more than 11,000 customers year to date in fiscal 2022. The company continues to make systematic capital investments for increasing the safety and reliability of natural gas production and storage facilities and replacing the aging infrastructure for modernizing the system.

UGI spent $674 million in fiscal 2021 and invested $546 million in the first nine months of fiscal 2022.

In February, UGI entered an agreement with Global Clean Energy Holdings to purchase and distribute renewable LPG in California. In April, the utility acquired a 33% equity interest in Ag-Grid Energy, a renewable energy producer with projects in the United States. These initiatives should aid UGI in expanding its renewable and environmentally friendly products.

UGI’s total debt-to-total-capital ratio for the fiscal third quarter of 2022 was 52.8%, lower than 54.2% in the fiscal third quarter of 2021. As of Jun 30, 2022, UGI’s available liquidity was $2.1 billion, adequate to meet the current debt obligations.

UGI’s times interest earned ratio was 6.7 at the end of the third quarter of fiscal 2022, higher than 5.0 in the year-ago quarter. These ratios are indicative of the company’s adequate financial flexibility to meet debt obligations.

Headwinds

UGI is exposed to several regulatory and environmental issues for domestic and international operations. Its business is highly seasonal, and unfavorable weather can dent demand, thereby lowering profitability.

In addition, UGI is exposed to higher interest rate risks, which can increase UGI’s borrowing cost and also have an adverse effect on the company's operating and financial results. The fall in demand due to the price fluctuation of natural gas can lead to lower revenues, which can adversely affect cash flows.

Price Performance

In the past six months, shares of UGI have rallied 3.6% compared to the industry’s 2.5% decline.

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Stocks to Consider

Some better-ranked stocks from the same industry are Atmos Energy Corporation ATO, National Fuel Gas Company NFG and NewJersey Resources Corporation NJR, each currently carrying a Zacks Rank #2 (Buy).

The long-term earnings growth rate of Atmos Energy, National Fuel Gas Company and NewJersey Resources is projected at 7.5%, 13.6% and 6%, respectively.

The Zacks Consensus Estimate for 2022 earnings per share of Atmos Energy, National Fuel Gas Company and NewJersey Resources has moved up 8.8%, 38.9% and 13.9% year over year, respectively.

In the past three months, ATO, NFG and NJR shares have risen 10.1%, 5.2% and 11.3%, respectively.


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