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On Monday, Mizuho (NYSE:MFG) Securities adjusted its stance on Atmos Energy (NYSE:ATO), downgrading the company’s stock from Outperform to Neutral, while also marginally decreasing the price target from $165.00 to $164.00. The move reflects the firm’s perspective on the limited potential for further multiple expansion due to the company’s substantial premium compared to its utility peers. According to InvestingPro data, ATO currently trades near its 52-week high of $161.49, with a market capitalization of $25.1 billion and a P/E ratio of 22.4x.
The analysts at Mizuho highlighted that Atmos Energy’s forward-looking price-to-earnings (P/E) ratio for fiscal year 2027 is estimated at 18.9 times, which is slightly above that of its closest competitor. Despite acknowledging that Atmos Energy’s premium is justified, given its ability to turn significant capital expenditures into strong rate base and earnings per share growth, Mizuho sees little room for the premium to grow without an official increase in growth targets from the company. InvestingPro analysis shows the company has maintained dividend payments for 43 consecutive years, with a current dividend yield of 2.2% and healthy dividend growth of 8.1% over the last twelve months.
Mizuho’s revised price target of $164.00 implies a target P/E multiple of 19.5 times for the fiscal year 2027 earnings estimates, which are already above consensus. The firm’s analysts believe that while Atmos Energy operates in constructive jurisdictions and has already seen benefits from the APT Pipeline, these factors are well-recognized by the market, leaving few catalysts to drive further appreciation in the stock’s value. Based on InvestingPro’s comprehensive analysis, which includes over 30 key metrics and financial health indicators, Atmos Energy maintains a "GOOD" overall financial health score, suggesting strong fundamental performance despite valuation concerns.
The downgrade comes despite Mizuho’s recognition of Atmos Energy’s potential to continue achieving the higher end of its 13-15% rate base growth and 6-8% annual earnings per share growth targets. However, without an official upward revision of these targets, the analysts see the current premium as unlikely to expand in the medium term.
Atmos Energy, a company involved in the distribution, transmission, and storage of natural gas, has been trading at a significant premium compared to both gas utility peers and the broader utilities sector. Mizuho’s assessment suggests that the market has already accounted for the company’s positive attributes, leading to the decision to downgrade the stock and adjust the price target accordingly.
In other recent news, Atmos Energy Corporation reported its earnings for the fourth quarter of 2024, surpassing earnings per share (EPS) expectations with a result of $2.23 compared to the forecast of $2.20. Revenue for the quarter was in line with projections at $1.35 billion. Despite the earnings beat, Moody’s Ratings downgraded Atmos Energy’s rating to A2 from A1, impacting approximately $8 billion of debt instruments, while maintaining a stable outlook. The downgrade reflects Atmos’s credit metrics, which are expected to remain at lower levels over the long term due to significant capital expenditures and increased debt levels. Additionally, Atmos Energy extended its senior unsecured revolving credit facilities, with the Three Year Credit Agreement now maturing in 2028 and the Five Year Credit Agreement extended to 2030, both valued at $1.5 billion each. These extensions are part of Atmos Energy’s strategy to maintain liquidity and financial flexibility. The company’s operations are supported by a low-risk business model and strong cost recovery mechanisms, though financial constraints persist due to high capital expenditure plans.
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