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Spectra Energy Partners, LP (SEP), NextEra Energy, Inc. (NEE): Is Spectra Energy Corp. (SE) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Spectra Energy Corp. (NYSE:SE) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Spectra Energy Corp. (NYSE:SE)What we’re looking for
The graphs you’re about to see tell Spectra Energy Corp. (NYSE:SE)’s story, and we’ll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Spectra Energy Corp. (NYSE:SE)’s key statistics:

SE Total Return Price Chart

SE Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 10.2% Fail
Improving profit margin (5.4%) Fail
Free cash flow growth > Net income growth (120.2%) vs. 4.2% Fail
Improving EPS 1.7% Pass
Stock growth (+ 15%) < EPS growth 69.8% vs. 1.7% Fail

Source: YCharts. * Period begins at end of Q1 2010.

SE Return on Equity Chart

SE Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity (18.2%) Fail
Declining debt to equity 21.7% Fail
Dividend growth > 25% 22% Fail
Free cash flow payout ratio < 50% Negative FCF Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we’re going
Things don’t look good for Spectra today. The natural gas specialist earned only one out of nine possible passing grades. One major source of that weakness is Spectra Energy Corp. (NYSE:SE)’s falling free cash flow, which may not be able to support its current dividend distribution if the decline continues. Anemic growth everywhere else also underscores the difficulty of succeeding when nat-gas prices remain low. Will Spectra Energy Corp. (NYSE:SE) be able to move past this weakness around and rebound, or is the utility services provider going to be tarnished for some time to come? Let’s dig a little deeper.

Natural gas companies have been recovering slowly from tough times, the result of weak natural gas prices resulting from persistent oversupply. Global natural gas consumption is expected to increase by a rather low 0.6% annually through 2040, which might not be so bad if the U.S. nat-gas infrastructure could be tuned to meet international demand, thus opening Spectra Energy Corp. (NYSE:SE) and other players to higher prices elsewhere in the world.

Spectra is also nearing the end of its spin-off of its U.S. transmission, storage, and liquid assets to Spectra Energy Partners, LP (NYSE:SEP) which is scheduled to be completed by 2014. This handoff will enable Spectra to focus on fewer lines of business, and it might also result in higher dividends for Spectra’s shareholders, as the company will own around 82% limited partnership shares in SEP once the transaction is complete. Spectra and its MLP subsidiary Spectra Energy Partners, LP (NYSE:SEP) have both expanded the scale and length of their contracts, from 119,000 barrels per day (mbpd) to 225 mpbd and from 1.5 years to 11 years, respectively, on their Express-Platte pipeline. Spectra also recently entered into a partnership with NextEra Energy, Inc. (NYSE:NEE) subsidiary Florida Power & Light to construct a $3 billion natural-gas pipeline, which will stretch from Alabama through Georgia to Florida. This infrastructure project is expected to begin in 2016 and will take at least a year to complete.

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