Is It A Good Time To Buy This Utility?

| About: Public Service (PEG)

By Brian Tracz

Public Service Enterprise Group (PEG), the utilities holding company commonly known as PSEG, reported earnings on Tuesday of $0.43 per share, missing the consensus estimate by $0.02. The company, which owns a variety of electric and gas utility businesses, has about 14,400 megawatts of generating capacity across its electric utility businesses. Its businesses include Public Service Electric and Gas Co., PSEG Power (both nuclear and fossil-fuel electric

utilities) and PSEG Energy Holdings. A variety of hedge funds have positions in PSEG, including Joel Greenblatt's Gotham Asset Management (you can view the other funds holding this stock here).

The company reported a 9.9 percent decrease in operating expenses year-over-year, a solid cost structure that is battling against a subpar year; kilowatt-hour sales are expected to increase by less than 1 percent in 2012. Though these are disappointing data, they obviously reflect the economic uncertainty that enshrouds U.S. consumers of gas and energy. All-in-all, PSEG complies closely with EPA guidelines and maintains a diversified set of fuels for its power plants, so it is well-positioned to benefit from an improved economic outlook.

PSEG is attractively priced compared to its peers. Looking at EV/EBITDA, PSEG looks well-priced with a multiple of 6.4, while First Energy (FE) has a multiple of 9.9, PG&E (PCG) a multiple of 7.9, and American Electric Power (AEP) a multiple of 8.1. PSEG shares trade at about 13.8 time forward earnings, similar to that of American Electric Power. On the other hand, PG&E and First Energy are trading at a premium to this at 14.9 times and 15.6 times forward earnings, respectively. So on a market and book valuation basis, PSEG is attractively valued.

As a well-run utility company, PSEG has successfully maintained healthy cash flow and a healthy balance sheet. Fitch recently upgraded the company's debt to "A-" with a stable outlook. The company's projected cap ex of $2.57 billion for 2012 is up from $2.08 billion in 2011. Management is aiming to expand its transmission lines to steadily grow sales. PSEG Energy Holdings is actively looking for opportunities to participate in renewable solar and wind energy generation projects. On Tuesday, the company asked New Jersey state regulators for approval of a $883 million project to expand the solar energy capacity of the company's operations in the state.

This prospect for growth, coupled with its relatively cheap valuation, make PSEG a good investment. It isn't a stock for "traders," per se. PSEG shares have not traded above $35 over the past three years, nor have they traded much below $30. The shares barely flinched in August and October last year during the U.S. fiscal crisis. The annual dividend yield for the shares is 4.3 percent. I like this stock as a "better-than-treasury" equity--allowing for decent capital preservation and returns. That said, its relatively cheap pricing makes it a good value play in the utilities sector. However, the high degree of stability in the utilities sector relies in large part on economic factors that, in turn, will be heavily influenced by Federal Reserve statements and jobs reports that are due out this week.

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