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NSTAR Is Made for Winter of Discontent

Sam Patel

For a related story on utilities, see Alan Farley's take on the industry.

If you're like Alan Greenspan and his cohorts in government who are shocked at the credit and banking crises and now have no idea where to invest, keep an electric utility in mind. Our models rate NSTAR Electric (NST Quote) an "A minus," and the company has earned that rating. Given the turmoil in the stock market, NSTAR is down only 2% this year.

The shares trade at $33, down from a 52-week high of $40, producing a modest price-earnings multiple of 15 and a healthy yield of 4.2%. Both the P/E and yield signal a stock with a stable earnings outlook. Put another way, this is not a growth stock with a very high P/E, or low or negligible yield, but a stable revenue-generator during volatile times.

The idea behind considering this stock for investment is reasonably intuitive. The company's business focuses on the distribution, transmission and sale of energy in Massachusetts. The company services about 1.1 million electricity distribution customers and 300,000 natural gas distribution customers. It was founded in 1886, which means it's seen a few downturns in its time and survived every one of them, including the Great Depression.

Living in Massachusetts, I am umbilically attached to this company for life-giving heat during the brutal Northeast winters that can last until April. As much as I detest paying its bills, I have no choice if I wish to survive winter, which is bad for me but good for this stock going into what looks like a bleak economic outlook for 2009.

Despite having a product or service that could be labeled a necessity, NSTAR isn't immune to falls in profits and revenue. Some consumers may not be able to pay their bills as the economic crisis worsens. But the reality is that NSTAR's revenue has been growing steadily since 1999 and didn't miss a beat during the 2001 downturn. So there is evidence that the stock is recession-resistant, if not recession-proof.

Net income collapsed in 2001, caused by the impairment stemming from NSTAR's entire investment of $173 million in RCN Corp., whose stock was brutalized in the technology bubble. Apart from this one glitch, the company was solid through the 2001-2002 downturn.