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Why I believe the National Grid share price is far too cheap

There’s no better investing bargain than the share of an otherwise healthy company that’s dipped on questionable news flow and speculation, in my view. In this context, I had written about fashion brand and retailer Ted Baker a few months ago, when its share price had plunged by over 22% on the back of a company scandal. It rose steadily over the next few months, falling only after the company put out pessimistic earnings guidance recently.

Similarly, FTSE 100 listed utility provider, National Grid (LSE: NG) is a strong company whose share price fell recently on news of potential re-nationalisation if Labour came back to power. I think this is understandably difficult news to digest for investors, particularly since it comes hot on the heels of another kind of labour challenge. Its US operations had hit full stop for six months on a dispute regarding terms for workers and resumed only in January this year.

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Not to mention that questions of the potential Brexit impact still hang in the air. It’s little wonder that the share price has fallen by around 5% in April so far compared to last month. However, I am of the view that this decline is an opportunity to invest, after analysing the reasons dragging the share price down.

Labour troubles

With respect to the Labour party’s plans, the most critical point to underline is that elections aren’t scheduled to take place for two years. And a lot of plans can change in that span of time. When they do take place, there’s really no guarantee that Labour will win. Further, as my colleague GA Chester pointed out recently, even if it does come to power and it does for for re-nationalisation, the shares will be converted to bonds, likely at a fair price. And that doesn’t sound like a bad deal to me!

On the other labour trouble, that is, the strike in the US, the issue has been laid to rest for the next five years. The company struck a deal with the workers on compensation, and operations have now resumed.

Brexit woes

Besides those issues, will Brexit adversely impact the company? While the utility business falls under the category of  ‘defensives’, which otherwise makes it a safe play, in this case, ‘interconnectors’ or cables across countries creates dependencies with the rest of Europe. According to UK government estimates, electricity imports could account for over 20% of the country’s requirements.

However, I like that the company seems to have sorted this issue out already. In its annual report, it said: “Our interconnector partners share a financial interest in the ownership and profits from their operation… we have been assessing these issues and….have determined that the risk of increased costs of tariffs and any possibility that our partners might be compelled to ‘switch off’ the interconnectors is low.”

Strong financials

With National Grid being financially sound and with a relatively muted price to earnings ratio of 8.4x, I see little reason to be intimidated by potential challenges on the horizon. I think it’s a good time to buy.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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