New Jersey Resources: More Confidence in Diversified Business Model; Raising Fair Value Estimate

We are raising our fair value estimate for New Jersey Resources NJR, or NJR, to $45 per share from $43 after gaining more confidence in the company’s medium-term growth during recent discussions with management. We reaffirm our narrow moat and stable moat trend ratings.

NJR’s diversified business model distinguishes it from other natural gas distribution utilities by providing flexibility to invest in businesses with the highest returns on capital. NJR has done this successfully in recent years, building out its midstream and renewable energy businesses. We think management is committed to this diversified strategy, which should insulate it from the long-term risk that growth will slow at its gas distribution utility.

We were skeptical that NJR would be able to finance its growth investments and achieve management’s 7%-9% average annual earnings growth target without issuing equity during the next five years. We’re now more comfortable that the midstream business can provide enough cash to cover equity needs at the utility for the next few years.

We remain skeptical that NJR can hit the high end of management’s growth target, which is among the highest in the sector. But we forecast growth solidly within management’s target range during the next five years.

Outperformance at NJR’s energy services business during its first fiscal quarter will boost growth this year and provide excess cash to help reduce near-term equity needs. First-half earnings are up 13% and on track to meet our full-year earnings estimate in line with management’s revised $2.62-$2.72 EPS guidance range.

A constructive rate review at NJR’s New Jersey utility next year will support growth into 2026. The clean energy ventures business, which is set to generate at least 20% of adjusted earnings in 2024, continues to grow its pipeline of projects and is on track to meet our 20% annualized growth forecast for at least the next five years.