What follows is a list of utilities. While their low multiples and dividend yields make them appear undervalued, significant headwinds will depress valuation. These headwinds include environmental regulations, competition, and low growth opportunities. Overall, I find the greatest upside for PPL. All ratings are sourced from NASDAQ.
CenterPoint (CNP)
CenterPoint is rated a "hold" and trades at a respective 10.6x and 15.6x past and forward earnings with a divined yield of 4.2%.
Consensus estimates for CenterPoint's ESP forecast that it will grow by 6.6% to $1.45 in FY2011 and then by 6.9% and 5.8% in the following two years. Assuming a multiple of 15x and a conservative FY2012 EPS of $1.49, the rough intrinsic value of the stock is $22.35, implying 16.7% upside. CenterPoint faces significant uncertainty in midstream, but much of the risk can be alleviated if management clarifies how it will use the $1.7B worth of securitization proceeds. Takeover activity will help lock in market share while the firm's interest in natural gas will help generate higher risk-adjusted returns. The Haynesville, Woodford, and Fayetteville shale plays all have excellent momentum.
Exelon (EXC)
Exelon is rated a "hold" and trades at a respective 10.4x and 12.8x past and forward earnings with a dividend yield of 5.4%.
Consensus estimates for Exelon's EPS forecast that it will decline by 27.2% to $3.03 in 2012, and then by 6.6% and 1.4% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $2.78, the rough intrinsic value of the stock is $36.14, implying 6.9% downside. 2011 performance was better than original expectations, but weakness in December gives me pause. Generation fleet delivered strong execution while the Illinois Energy Infrastructure Modernization Act established a favorable environment for growth. The merger with Constellation (CEG) will, however, be dilutive, in my view, due to strong secular trends for gas.
PPL (PPL)
PPL is rated a "hold" and trades at a respective 10.3x and 11.4x past and forward earnings with a dividend yield of 5.4%.
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 18.3% upside. The company has efficient operations and is thus better able to handle headwinds than peers can. Busload operations are also well positioned to do well with greater fuel cost spreads. I am most optimistic about this firm due to its relatively high dividend yield, low volatility, and multiples compared to peers.
Duke Energy (DUK)
Duke is rated a "hold" and trades at a respective 16.3x and 14.1x past and forward earnings with a dividend yield of 4.8%.
Consensus estimates for Duke's EPS forecast that it will be roughly flat at around $1.45. Assuming a multiple of 15.5x and a conservative 2013 EPS of $1.41, the rough intrinsic value of the stock is $21.86, implying little upside. The planned merger with Progress Energy (PGN)will create the country's biggest utility with 57 gigawatts of US generating capacity powering 7 million consumers in North Carolina, Florida, Indiana, South Carolina, Kentucky, and Ohio. Both firms have received a grant of $200M for distribution grid automation systems and home energy management. I believe that that the merger will meaningfully hedge against uncertainty and Duke's $1B capital spending over the next half decade in smart grid technology.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The distributor of this research report is not a licensed investment adviser or broker-dealer. Investors are cautioned to perform their own due diligence. We seek business relationships with all of the firms in our coverage, but research covered in this note is independent.
