Is Atlantic Power Destined for Greatness?

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 Atlantic Power (NYSE: AT  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Atlantic'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 Atlantic's key statistics:

AT Total Return Price Chart

AT Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

122.6%

Pass

Improving profit margin

47.8%

Pass

Free cash flow growth > Net income growth

(258.8%) vs. (16.2%)

Fail

Improving EPS

12.4%

Pass

Stock growth (+ 15%) < EPS growth

(60.7%) vs. 12.4%

Pass

Source: YCharts. * Period begins at end of Q2 2010.

AT Return on Equity Chart

AT Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

51.6%

Pass

Declining debt to equity

112.4%

Fail

Dividend growth > 25%

(63.2%)

Fail

Free cash flow payout ratio < 50%

Negative FCF

Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Atlantic doesn't put together a dominant performance, as it's mustered only five out of nine possible passing grades. Despite promising revenue growth, Atlantic's free cash flow has fallen off a cliff, and that poses big problems for the company's already-reduced dividend. Will Atlantic be able to rebound, or is the utility going to short out when investors are most in need of a little light? Let's dig a little deeper to figure things out.

Atlantic's latest bottom-line results showed an unexpected profit, which at $0.02 per share beat estimates by a whopping $0.28. However, that hasn't been enough to offset the sell-off in Atlantic's shares after management announced a 66% reduction in its dividend. However, the move -- which destroyed a mouthwatering 10.2% yield -- resulted in a more sustainable payout ratio, provided the company can return to a positive cash flow. Atlantic's utility peer Exelon (NYSE: EXC  ) has also slashed its dividend payouts to shareholders recently, so the problem is certainly not isolated.

Atlantic has recently divested $208 million of non-core assets to refocus on more profitable business. These cost cutback are more endemic to the beleaguered utility sector than dividend reductions: Duke Energy (NYSE: DUK  ) aborted has its plan to establish a new $25 billion nuclear plant, while FirstEnergy (NYSE: FE  ) will shut down 10% of its capacity to remove coal-fired losses from its fleet of plants. Duke has actually boosted its payout slightly this year, so it's at least doing a better job at keeping costs under control.

Both Atlantic and Duke are looking for alternatives to coal to satisfy customer energy demands. Duke might have abandoned a nuclear strategy, but it's moving into solar with a 4.5 megawatt solar project that it recently acquired in San Francisco. Atlantic's biomass-fired power plant, which is based in Georgia, should provide renewable tax credits that might help offset recent losses, but Fool contributor Justin Loiseau points out that the company now has lowered expectations for the value of those credits. The company is also looking into obtaining further wind production tax credits in the near future.

Putting the pieces together
Today, Atlantic Power has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Did you get burned when Atlantic slashed its payouts? If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are really better. Click here to keep reading.


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