Why Wall Street Is Cautious About PPL, Xcel And Duke

| About: PPL Corporation (PPL)

Even though utilities offer high dividend yields and low volatility, the Street still views PPL (NYSE:PPL), Xcel Energy (NYSE:XEL), and Duke (NYSE:DUK) with much trepidation. It rates both PPL and Xcel a "hold" versus around a "sell" for Duke. Based on my multiples analysis and DCF model, I find limited to no upside for PPL and Xcel.

From a multiples perspective, PPL is the cheapest of the three. It trades at a respective 10.4x and 11.4x past and forward earnings while Xcel and Duke both trade at 15.4x past earnings. It also offers the highest dividend yield at 5.1%. All of the firms are 60% less volatile than the broader market.

At the third quarter earnings call, Duke's CEO, Jim Rogers, noted solid performance:

"This morning, we released strong third quarter results and are very pleased with the exceptional performance of our fleet.

As a result of our year-to-date earnings, we are increasing our 2011 adjusted diluted per-share earnings guidance range from between $1.35 and $1.40 to $1.40 and $1.45.

We committed to you after announcing our proposed merger with Progress Energy that we would continue to stay focused on running the business, delivering results and executing on our long-term strategic initiatives. The ability to increase our earnings outlook in a year that includes a pending merger transaction, a busy docket of regulatory proceedings, continuing economic uncertainty and significant storm damage to our system is due primarily to our employees who are single-mindedly focused on safety, and excellence and execution".

PPL similarly had strong third quarter results. Recently passed legislation in Pennsylvania will allow for alternative rate-making and thus help margins. But with forward prices low for electricity and natural gas, investors are rightfully concerned about margins overall eroding. The Air Toxics Rule, which will impose caps in 2015, only add to the cost burdens. With that said, PPL has lean and efficient operations that are capable of better handling the headwinds than peers are. Two-thirds of business comes from busloads operations and the firm will continue to benefit from fuel cost spreads.

Consensus estimates for PPL's EPS forecast that it will decline by 15.7% to $2.64 in 2011, decline by 8.7% in 2012, and then grow by 3.7% in 2013. Assuming a multiple of 14x and a conservative 2013 EPS of $2.35, the rough intrinsic value of the stock is $32.90, implying 19.7% upside. This does not meet the 25% threshold that I consider indicates a value play.

Recent quarterly results were roughly in-line for Xcel in terms of earnings, but were mostly disappointing in terms of sales. Colorado PUC recently approved the firm's use of deferred accounting on a $42M rate request following the termination of its wholesale contract. Meanwhile, it is waiting for approval from the Minnesota PUC. Net debt is expected to rise by around $2B over the next three years as ROE remains roughly flat at around 10%.

Consensus estimates for Xcel's EPS forecast that it will grow by 4.7% to $1.80 in 2012 and then by 5.6% and 4.7% in the following two years. Modeling a CAGR of 5% for EPS over the next three years and then discounting backwards by a WACC of 9% implies that the firm is roughly trading at fair value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.