Utility companies are sometimes thought of as boring, steady income opportunities with limited capital gain potential. However, over my 11 years of investing I have found that well-managed utility companies can provide significant capital gains as well as a growing income stream, resulting in excellent returns for patient, long term investors. Today, I am going to highlight MDU Resources Group Inc (NYSE:MDU), which has been a rock solid performer for my portfolio that I can honestly say has been anything but boring.
Regulated Operations
MDU’s regulated business segment includes electric utility operations, natural gas utility operations, and pipeline and energy services. MDU distributes electricity in Montana, North Dakota, South Dakota and Wyoming, and owns or has interests in eleven electric generating facilities, including two wind farms. MDU Resources Group Inc (NYSE:MDU) distributes natural gas in Montana, North Dakota, South Dakota, Wyoming, Oregon, Idaho, and Minnesota. MDU’s 2007 acquisition of Cascade Natural Gas Corporation and 2008 acquisition of Intermountain Gas Company tripled it’s natural gas distribution customer base.
Exploration and Production
Fidelity Exploration and Production Company, a subsidiary of MDU, is involved in the acquisition, exploration, development, and production of oil and natural gas. Fidelity operates in Texas, Louisiana, Oklahoma, New Mexico, Colorodo, Utah, North Dakota, and Wyoming. This segment represents MDU’s growth engine in upcoming years.
Construction
Knife River Corporation, a subsidiary of MDU, mines and sells a wide variety of construction materials including crushed stone, sand, gravel, ready-mix concrete, cement, and asphalt. MDU has significantly expanded their construction materials business by completing a very large number of successful acquisitions. Knife River operates in the central, southern, and western portions of the U.S.
MDU’s Construction Services unit consists of the construction and maintenance of electrical systems, traffic and communications systems, gas pipelines, and mechanical systems. These services are available for a wide variety of commercial and industrial applications. This unit also includes businesses that are involved in equipment rental and sales, and electrical wholesale and distribution.
Competition
Cemex SAB de CV (ADR) (NYSE:CX) is based in Mexico with operations in over 50 countries and annual sales of over $15 billion. Cemex is a manufacturer of a wide variety of construction products, such as concrete, aggregates, asphalt, and precast products such as culverts and concrete blocks. Some of CX’s products compete directly with MDU’s Knife River subsidiary in the U.S. The great recession, the decline in housing, and a large acquisition at the wrong time caused CX’s sales, earnings, and stock price to tumble.
However, the housing market is slowly starting to show signs of life, and this is indicated in CX’s annual sales, which have increased for two consecutive years. The share price has shown signs of recovery as well, even as CX has not made it back to profitability. CX’s share price has climbed back from a low of below $3 per share to the recent closing price of $11 per share, but is still well below it’s high of over $30. Cemex has a global footprint with products that will be in high demand with a booming global economy. Unfortunately, the global economy has a long way to go in its recovery efforts, and as a result I consider CX to be a speculative stock with potentially high rewards.
