MGE Energy, Inc. (MGEE), PNM Resources Inc (PNM), Avista Corp (AVA) – Small-Cap Utilities: Rockets or Bombs?

What’s more likely to happen: a $50 billion behemoth growing by 50% or a $2 billion upstart doubling or tripling? Theoretically, any company can expand with almost no limit. But in practice, investors are more likely to buy a $20 stock that was $10 last year than a $500 stock that used to be $400. If you remember the Panic of 2008 and particularly the Dot-Com bubble bursting in 2000, though, you remember how many smaller companies just couldn’t survive when the market got rough. Let’s see how a few utility companies, which are normally robust, are likely to fare.

Beware the old standby

MGE Energy, Inc. (NASDAQ:MGEE) has been operating in one form or another since 1888, so it’s definitely seen some bad times. The company also has a division, MAGAEL, devoted to holding property so that the business can expand. Any company with an eye to the future has a leg up over companies that are obsessed with the current quarter. With 140,000 power and 145,000 natural gas customers, MGE Energy, Inc. (NASDAQ:MGEE) has a solid foothold in Wisconsin.

One small issue, however, is the extreme dependence on the Wisconsin economy that MGE Energy, Inc. (NASDAQ:MGEE) carries. While utilities tend to be fairly solid due to monopoly status and steady demand, one natural disaster could spell a lot of trouble for MGE. I believe this is largely counterbalanced by the 12% profit margins the company produces and the fact that it’s trading for around 18 times earnings, which is one of the less expensive companies in the sector. Unfortunately, I do not see MGE Energy, Inc. (NASDAQ:MGEE) beginning a phase of dramatic growth even by utility standards.

The market doesn’t see everything

PNM Resources Inc (NYSE:PNM) is unusual in that it serves two of the major power grids in the country – part of the one in the western part of the U.S., in New Mexico, and part of the Texas grid. As a company that has operated in some form since 1917, PNM Resources Inc (NYSE:PNM) holds a wider base of operations than the market has acknowledged so far. In fact, the company is trading for little more than book value.

While the 7.4% profit margins and the fact that the company is trading for more than 18 times earnings aren’t indicators of great growth potential, the growth of many economies in Texas’s major cities and the company’s book value are great signs. Simply put, the market hasn’t caught on to how much infrastructure and potential PNM Resources Inc (NYSE:PNM) has, leading to a lower valuation than it deserves. I believe PNM Resources Inc (NYSE:PNM) has the potential to expand considerably and grow its share price at least as much given its markets and its current valuation.