This Natural Gas Distributor Is Growing: Southwest Gas Corporation (SWX)

Southwest Gas Corporation (NYSE:SWX) is scheduled to report earnings on Feb. 28. In addition to its gas business, the company derives revenue from construction services. The company likely earned about $1.23 in the December quarter, versus $1.19 in the prior-year quarter. What differentiates SWX is its construction business, essentially a piping contracting unit serving utilities.

Southwest Gas Corporation (NYSE:SWX)Natural Gas Margins Improving

Although natural gas prices are still weak, SWX is generating improved profitability in its transportation and distribution operation. The bulk of the increase is stemming from rate relief in Arizona, one of SWX’s main markets, as well as probably from the November rate hike in Nevada. Additionally, SWX is adding to its customer base, further supporting the bottom line.

Construction Unit Promising

Southwest Gas Corporation (NYSE:SWX)’s contracting business is experiencing top-line (revenue) gains without income expansion. Demand for replacement projects has been lifting revenues to roughly 47% of the company total. But, expenses have more than offset the impact, and it is uncertain if the margin erosion will subside in the near term. On that note, if cost containment occurs, profit growth could well accelerate.

The Stock

SWX shares may have appeal with an expense cut in its Construction unit. A look at the upcoming 10-Q should provide some insight into what the prospects might be for that division.

Here’s another gas stock that may be of interest, Suburban Propane Partners LP (NYSE:SPH):

Suburban Propane’s core operation is the sale of propane, and volumes sold more than doubled year over year in the December quarter thanks to the acquisition of Inergy Propane. In the key March quarter, SPH may well post share net of around $2.56, up $1.10 from the prior year, despite a large share issuance related to the purchase.

With the Inergy buyout, Suburban approximately doubled its customer base, and the New Jersey-based entity expanded into eleven new states. Propane sales fluctuate on weather and the prices of substitutes like natural gas and electricity. Notably, conditions have not been ideal of late, resulting in lower prices for propane. Otherwise, forecasts would be even greater.

SPH shares can be viewed primarily as an income stock. It, in fact, recently boosted its payout to a $3.50 annual level, reflecting an 8.3% yield. For capital appreciation, the stock’s elevated price appears to minimize its upside at this time. In all, I suggest only those seeking high-yield stocks consider SPH at this time.

This leads me to a natural gas stock also offering a generous yield, in this instance 3.7%. The company is Atmos Energy Corporation (NYSE:ATO)

Atmos’ share earnings are apt to remain rather stable. Specifically, management is targeting earnings of $2.40 to $2.50 a share this year, as compared with last year’s $2.42. It is expanding the capacity of its regulated pipeline assets and believes it can grow earnings 6% to 8% annually out to 2016. For a company that acts like a utility, this would represent meaningful bottom-line improvements.

Given that outlook, and a consistently rising dividend, ATO shares might reward investors over the 3- to 5-year span.

In sum, shares of SWX hold appreciation potential with the caveat of a turnaround in its construction division. SPH stock is for those wanting a sizable stream of income. Finally, ATO is a natural gas utility that may have some long-term price upside as well.

The article This Natural Gas Distributor Is Growing originally appeared on Fool.com and is written by Damon Churchwell.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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