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Jeremy Frommer, CEO of Hedge Fund LIVE Jeremy Frommer has 20 years of industry experience and is currently responsible for general management and leadership of the General Partner. Previously, Mr. Frommer was a Managing Director and Head of the Global Prime Services Group (“GPS”) at RBC... More
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  • EDE  0 comments
    Mar 7, 2011 8:53 AM | about stocks: EDE

    HedgeFundLIVE.com –

    EMPIRE DISTRICT ELECTRIC CO

    Ticker: EDE

    Recommendation: BUY

    52 Week Range: $17.57 – $22.50

    Current Price (March 4th): $21.27

    Base Price Target: $24.78

    Business Description:

    EDE is a public utility firm that provides electricity services in parts of Missouri, Kansas, Oklahoma and Arkansas.  The company also provides water service in Missouri. At end of year 2009, 89.1% of revenue came from Missouri, 5.1% from Kansas, 3% from Oklahoma and 2.8% from Arkansas. In terms of business area, 87% of revenue was from electric sales, 12% from gas and 1% from others.

    Industry Outlook:

    On the demand side, according to EIA, the electricity consumption by industry is expected to grow 1.7% while improved economic condition should also increase commercial sector consumption by 1.1%. On the price side, due to government conservative policy, electricity price may flatten out or increase slightly with shifts towards renewable resources.

    Financial Analysis:

    According to the company, consolidated earnings for the 3rd quarter 2010 is reported $23m increased by 55% compared with same quarter earnings 2009. Earnings for 12 months ended in Sep 2010 were $46.9 million compared to earnings of $41.1 million for the 2009 twelve month period1. EPS increased from $1.16 at prior year to $1.18 end of 2010, we believe this trend is going to continue for next year with increasing demand for electricity.

    While EDE is a strong profit margin, high dividend payout ratio, and high quick ratio company, we expect it is able to pay its bills and fund future growth.

    Investment Recommendations:

    We believe the company is a good buy because of the followings:

    • EDE implemented its rate increase in Missouri which will grant them additional annual revenue of $46.8m; this is expected to boost EPS up to $1.5 in 2011.
    • Favorable weather increased electricity demand is expected to persists throughout 4th Q and early next year.
    • Recent filing for latan 2 rates increase to be effective on Aug 2011 may further increase its revenue in 2012.

    Our stock valuation analysis using RIM has indicated the followings:

    Bull, Base and Bear case scenarios compute stock price of $36.52, $22.46 and $15.25 with details shown in Appendix D.

    Risks:

    However, following risks need to be monitored in our investment horizon:

    • Upward trend of fuel prices may increase its resource costs
    • High operation and maintenance costs
    • Revenue is highly subject to government regulations
     

    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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