Credit Suisse suggests investors own utilities boasting good visibility to growth through capital expenditure programs, supportive regulation where the risk of cuts in return on equity is lower, and rate case stay-out protections that lower potential for regulatory intervention; to that end, its favorite utilities into the new year are CMS Energy (CMS), American Electric Power (AEP), NextEra Energy (NEE), Northeast Utilities (NU) and Dominion Resources (D).
Elsewhere in the sector, CS cuts EPS estimates for Entergy (ETR) after the utility received an order in Arkansas pointing to a 9.3% ROE vs. 10.4% requested, which will sustain questions about ETR's ability to execute on its growth strategy; the firm also lowers its EPS outlook for Con Ed (ED) after reaching a broad settlement on electric, gas and steam cases with a 9.2% ROE on electric and 9.3% for steam and gas.
"Subsidies and falling technology costs are making distributed solar power cost-competitive [and] as more people switch to solar, utilities sell less electricity to those customers [causing the] utilities [to] spread their high fixed costs ... over fewer kilowatt-hours, making solar power even more competitive and pushing more people to adopt it," WSJ's Liam Denning notes, describing what is dubbed "the death-spiral thesis" for traditional utilities.
Denning says it's the merchant generators (like NRG) that have the most to worry about: "For regulated utilities, the idea that solar panels will enable everyone to leave the grid, making such networks redundant, is overstated."
Although the threat may seem distant for now, Denning says it's worth taking seriously if you're an investor. "The gyres may look exceedingly wide, but that spiral is taking shape," he says.
Some individual names: Southern Company (SO), Edison International (EIX), Duke Energy (DUK -0.1%), FirstEnergy (FE -0.7%), XCel Energy (XEL +0.2%), American Electric Power (AEP -0.2%), Dominion (D -0.2%), Exelon (EXC +0.5%).
Deutsche Bank is out with some commentary on the utilities going into year-end.
Analyst Jonathan Arnold says that with the group "set to finish the year last among sectors for the second straight year, it is surely tempting to argue for a rebound in 2014."
Nevertheless, Arnold thinks that "with the Fed exit still [upcoming] and a continuing overhang from challenging power business fundamentals, investors have plenty of reason to proceed with caution."
Rundown: ETR cut to Hold from Buy, price target cut to $64 from $70; DUKreiterated at Buy, price target hiked to $76 from $74; PCGreiterated at Buy, price target cut to $46 from $48.50; CPNreiterated at Buy, price target cut to $23 from $24; AEP reiterated at Hold, price target raised to $50 from $48; Dreiterated at Hold, price target raised to $66 from $64; DTEreiterated at Hold, price target lifted to $72 from $71; NUreiterated at Hold, price target lifted slightly.
American Electric Power (AEP +0.9%) gets an upgrade to Overweight from Equal-Weight at Morgan Stanley.
"We believe the company delivered on its promise to provide investor clarity over the next several years and highlighted that its transition to more of a regulated utility is progressing well," analyst Stephen Byrd says, hiking his price target to $52 from $44.
Earlier this month at the Edison Electric Institute Financial Conference, AEP updated its guidance for EPS and capital budgeting.
American Electric Power (AEP) narrows EPS (ex-items) guidance for FY14 to $3.20-3.40 and says it expects to earn $3.30-3.60/share in FY15 and $3.45-3.85/share in FY16.
Management also reaffirms 2014 and 2015 capital budgets at $3.8B/year and projects a capital investment budget of $3.8B for 2016 as well.
"Our operating earnings projections for the next three years are supported by continued successful execution of the earnings growth strategy that we established early this year," CEO Nicholas Akins says.
Other expectations: $5B in investments in transmission between next year and 2016, separation of Ohio generation assets from the wires business at the end of this year. (PR)
Defense is working nicely today as the utility sector (XLU +1.4%) makes a strong move higher with the rest of the market lit up bright red. Few have had use for the steady dividend payers since rates started rising in May, but the sector has stabilized over the past month and is particularly well-bid today amid panicky action in high-flying momentum favorites.
Some individual names: Southern Company (SO +1.9%), Edison International (EIX +1.9%), Duke Energy (DUK +1.6%), FirstEnergy (FE +1.5%), XCel Energy (XEL +2.1%), American Electric Power (AEP +1.6%).
More on American Electric (AEP) Q2: profit -6.6% to $338M, revenue flat at $3.6B. Takes pretax charge of $154M on coal-powered Muskingum River plant, which the company is retiring, although the impairment is partly offset by an $80M tax credit. Profit from utility operations -39% to $221M, transmission operations climb to $18M from $8M, AEP River operations swing to a loss of $9M from a profit of $3M. Reaffirms 2013 operating EPS guidance of $3.05-3.25 vs consensus of $3.14. Shares -0.9%. (PR)
Goldman assembles a list of 25 dividend favorites with unusually high volatility - meaning put sellers are getting a hefty premium for agreeing to buy the stock at a lower price. Make sure you want the stock first. The strategy works well sometimes and is the proverbial catching a falling knife at others. PFE, BLK, SE, PCL, CL, AEP, SPG, PG, KMI, AVB, CLX, CTL, TWC, LO, T, PM, TWX, NSC, DUK, VZ, WHR, WY, NEE, XOM, SCCO.
American Electric Power Co Inc is a public utility holding company, through its subsidiaries, provides electric service, consisting of generation, transmission and distribution, on an integrated basis to its retail customers.