UBS Investment Research recently published a report entitled “US Research” on December 30, 2011. The report isn't publicly available, but we will summarize main points. In the report, they have listed their top stock ideas for 2012. This list includes the most-preferred and the least-preferred stock ideas. In this article we will discuss their top Energy/Utilities ideas.
Wisconsin Energy Corp. (WEC) generates, distributes, and sells electric energy and steam. UBS has given the company a buy-rating and has placed it on the most-preferred list. The company is expected to have 5% sustainable earnings per share growth. UBS expects a dividend growth of 8-9%. Wisconsin Energy has purchased $75 million worth of stock in 2011 and the company is expected to use the remaining discretionary cash to reinvest in the business. Shares of Wisconsin Energy are currently trading at $34.5 per share and are expected to reach a target of $37 per share, indicating a potential upside of 7%. The company is trading at 14x the EPS estimate given by UBS. Wisconsin Energy generated a return of around 20% for the year 2011.
LINN Energy, LLC (LINE) is an independent oil and natural gas company that develops and acquires oil and gas properties in the U.S. The company has been given a buy-rating by UBS. It is an attractive stock due to its dividend yield of 7.25%. The company has also been quite successful in acquisitions along with showing organic growth. Due to its business strategy, LINN Energy is protected from changes in the commodity price. Shares of the company are currently trading at $37.8 per share and are expected to see an upside of 22%, according to UBS. The company is trading at a discount to peers with an expected enterprise value to EBITDA ratio of 7.7x.
Calpine Corporation (CPN) is an independent wholesale power generation company that owns and operates natural gas-fired and geothermal power plants. It is the top sector pick by UBS and has been given a buy-rating. UBS notes that due to recent extreme weather events and a robust demand for electricity, Calpine is expected to see an increase in prices and spreads. Spark spreads are likely to see an upside of 40% in the near term. Shares of Calpine are currently trading at $15.8 per share and are expected to see an upside of 14%, to UBS’ price target of $18 per share. UBS is expecting a 9x enterprise value to EBITDA multiple in 2013. The company returned 24% in 2011.
Anadarko Petroleum Corp. (APC) engages in the oil and gas exploration and production and marketing activities. The company is one of UBS’ most preferred stocks. UBS thinks that Anadarko has a higher longer-term growth profile and a better exploration upside than its peers. The three recent mega-development projects are expected to bring high single-digit growth for the company over the next several years. A few catalysts that are going to propel the stock forward include the Jupiter exploration results, selling off its Brazilian assets (worth $4 billion), commercial settlement with Algeria that could be worth more than $5 per share, and an active exploration program that will span for 6 months. Shares of Anadarko are currently trading around $80 per share and are expected to reach $102 by the end of next year, indicating an upside potential of 27.5%. John Paulson is extremely bullish about APC. He had $893 million in the stock at the end of the third quarter (see John Paulson’s top stock picks).
EQT Corporation (EQT) operates as an integrated energy company. UBS has given the company a buy-rating and is UBS’ top pick in the integrated natural gas sector. Due to the low cost structure and high production growth, the company is expected to outperform its peers. UBS expects production sales growth to exceed 30% in 2012. The company has the lowest 3-year finding and development cost of 93-cents versus the group average of $2.78. EQT has recently announced that it will form an MLP with its midstream business, which will be a positive catalyst. Shares of the company are currently trading at $55.8 and are expected to reach a price target of $73. The company returned 23% in 2011. Steve Cohen’s SAC Capital had the largest stake in EQT among the 300+ hedge funds we are tracking.
Cameron International Corp. (CAM) provides flow equipment products, systems and services to oil, gas, and process industries. The company has been given a buy-rating by UBS. Cameron International is expected to gain from catalysts such as an increase in subsea tree awards, FPSO awards, modest growth in BOP after-market revenues, and market share gains in the company’s frac related business. Shares of Cameron International are currently trading at $49.9 and are expected to reach a price target of $64 per share. UBS estimates a price-to-earnings ratio of 17x in 2012. Currently, the stock is trading at a 26% discount to its peers on a forward price-to-earnings basis.
HollyFrontier Corp. (HFC) is an independent petroleum refiner and marketer in the U.S. The company has been given a buy-rating, with UBS claiming it to be the “most preferred name for early 2012”. This is due to the abundance of near-term catalysts such as a potential update in capital expenditure, sales of its UNEV pipeline, and a potential special dividend announcement in mid-February. Shares of the company are currently trading at $26.8 and are expected to see a potential upside of 64% to $44 per share. UBS expects its enterprise value to EBITDA ratio to be 3.5x in 2012. HollyFrontier returned 14% in 2011. Balyasny Asset Management had $117 million in HollyFrontier at the end of September.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.