The weakness in oil and gas prices has weighed on Williams Companies (WMB) stock recently. The stock fell 6% while natural gas fell more than 15% in the last three weeks. WMB has fallen more than 15% in the last 12 months.
Williams Companies stock: Technical indicators
Williams Companies stock is currently trading at $23.56, almost 2% and 11% below its 50-day and 200-day moving average levels, respectively. The stock trading below both these key support levels might concern investors.
Also, its 50-day level crossed below the 200-day level in August, which technical analysts call a “death cross.” This indicates a bearish trend. Williams Companies’ 50-day level close to $24.00 could act as a short-term resistance for the stock.
The stock is currently trading close to an oversold zone with its RSI (relative strength index) at 31. A stock with an RSI above 70 is considered overbought, and a stock with an RSI below 30 is considered in the oversold zone. An RSI at either extreme suggests that the stock might witness a reversal.
Earnings growth outlook
In the first half of the year, Williams Companies’ earnings increased to $586 million, almost double its earnings in the first half of 2018. Wall Street analysts expect its solid earnings growth to continue in the next few quarters.
As a pipeline operator, Williams Companies benefited from the solid demand for natural gas in the last few years. It expects US natural gas demand to increase by 4.9% compounded annually through 2021.
Its expansion projects on the Transco and Northwest pipelines are expected to accommodate the incremental demand. The Transco pipeline is the company’s most valuable asset and travels from South Texas to New York City. WMB’s management expects adjusted EBITDA growth of about 8% for 2019 and 5%–7% per year in the next few years.
Williams Companies stock is currently trading close to 23x its forward earnings. Its five-year historical average valuation is greater than 30x its forward earnings. In our view, it looks well-placed from a valuation standpoint.
Analysts expect the company’s EPS to increase 20% in 2019 and 15% in 2020 YoY. It looks reasonably valued given the expected earnings growth for the next few years. Midstream giant Kinder Morgan (KMI) is trading close to 20x its forward earnings.
Williams Companies stock is currently trading at a dividend yield of 6.5%, higher than its five-year average yield. Its dividends in the last five years have fallen by 1%. The company paid a quarterly dividend of $0.38 per share on September 30. That dividend represented an increase of 12% compared to the same quarter last year.
Williams Companies stock forms approximately 3% of the Energy Select Sector SPDR ETF (XLE). XLE offers a yield of 3.8%, while Kinder Morgan (KMI) yields 5%. Kinder Morgan stock has risen almost 33% so far this year.
Analysts expect handsome upside potential from Williams Companies stock for the next year. Based on analyst estimates, it has a price target of $30.00, which indicates an estimated upside of 27.3% for the next 12 months.
Of the 23 analysts currently tracking the stock, 11 recommend the stock as a “buy,” seven recommend it as a “strong buy,” and five recommend it as a “hold.” None of the analysts recommend it as a “sell.” In August, J.P. Morgan raised its December 2020 price target for Williams Companies from $30.00 to $31.00.
Williams Companies stock looks attractive from the total return perspective, given the potential upside and dividend yield. Given its potential earnings growth, Williams also looks attractively valued when compared in historical terms. However, its correlation with energy commodities makes it relatively riskier.
Midstream titan Energy Transfer (ET) was notably weak recently. You can read more in Energy Transfer Stock: Is Its Recent Fall an Opportunity?