What follows is a list of utilities that I find have very limited upside at the current moment. While they appear attractive at first glance due to their low betas and high dividend yields, they carry a significant amount of risk due to regulatory, competitive, and commodity volatility. Overall, reward does not outweigh risk, so I would definitely recommend holding out until all signs of a double dip dissipate.
Exelon trades at a respective 10.5x and 12.7x past and forward earnings with a dividend yield of 5.4%. Consensus estimates for Exelon's EPS forecast that it will decline by 26.4% to $3.06 in 2012 and then grow by 0.7% and 10.1% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $3.05, the rough intrinsic value of the stock is $39.65, implying that is fairly valued.
But perhaps the best reason why investors should steer away from a long position for now is due to the downside case. In a DCF model, I find that it is reasonably plausible for the stock to lose more than half of its value. Over the next half decade, I assume 9.6% per annum growth, OPEX as 75% of revenue, and capex as 19% of revenue. Taxes are estimated at around 39% of adjusted EBIT and net increases in working capital are estimated to hover around 2% of revenue. Taking a perpetual growth rate of 2.5% and discounting backwards by a WACC of 10% implies that the stock will lose around half of its value. However, this WACC estimated is definitely on the high-end. A more reasonable figure would be 7.5%, which implies slight upside.
CenterPoint Energy (CNP)
CenterPoint trades at a respective 11x and 16.2x past and forward earnings with a dividend yield of 4.1%. Consensus estimates for CenterPoint's EPS forecast that it will decline by 9.4% to $1.15 in 2012 and then grow by 7.8% and 8.1% in the following two years. Assuming a multiple of 18x and a conservative 2013 EPS of $1.18, the rough intrinsic value of the stock is $21.14, implying 6.9% upside.
Perhaps the biggest reason why investors are reserved about the stock is due to uncertainty in the midstream. With that said, the company has significantly reduced much of its risk through clarifying how it will use its $1.7B in securitization proceeds. I am also optimistic about the momentum at Haynesville, Woodford, and Fayetteville. As the industry consolidates, CenterPoint is well positioned to "size up" and increase market share.
El Paso (EP)
El Paso trades at 22.8x forward earnings and is 40% more volatile than the broader market. The company recently received significant shareholder approval to merge with Kinder Morgan (KMI). Consensus estimates for El Paso's EPS forecast that it will grow by 19% to $1.19 in 2012 and then by 9.2% in the following year.
In regard to the merger with Kinder Morgan, it will create a company with an enterprise value of $94B and the fourth largest company in North America. The company's midstream assets were highly coveted by Kinder Morgan and will help edge out CenterPoint, which is currently experiencing uncertainty in this area. El Paso should remind investors to consider backing companies that are taken over yet continue to trade under their exit multiples. At this point, however, the upside is limited.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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