Keep Your Distance From These 3 Utilities

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Includes: D, NEE, PPL
by: Takeover Analyst

What follows is a list of three utilities that the Street is bearish about. Despite high dividend yields and low betas, uncertainty surrounding the macroeconomy skews the risk/reward more towards the risk. Based on my multiples analysis and DCF model, I find that the three firms do not meet the 25% discount to intrinsic value that I consider merits calling an investment a "value play."

Dominion Resources (NYSE:D)

Dominion is rated near a "sell" on the Street and trades at a respective 19x and 14.5x past and forward earnings with a dividend yield of 4.2%. It has a beta of 0.5.

Consensus estimates for Dominion's EPS forecast that it will grow by 6.2% to $3.24 in 2012 and then by 6.5% and 4.3% in the following two years. Modeling a CAGR of 5.7% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $46.22, implying 7.3% downside. While the firm is expected to deliver solid performance in the regulated business, merchant generation has been struggling with lower capacity and challenged energy prices.

PPL Corporation (NYSE:PPL)

PPL is rated a "hold" on the Street and trades at a respective 10.5x and 11.5x past and forward earnings with a dividend yield of 5.1%. It has a beta of 0.4.

Consensus estimates for PPL's EPS forecast that it will decline by 15.7% to $2.64 in FY2011, decline by 8.7% in FY2012, and then grow by 3.7% in FY2013. Assuming a multiple of 14x and a conservative 2012 EPS of $2.35, the rough intrinsic value of the stock is $32.90, implying 18.8% upside. PPL had strong third quarter results. Its margins will also benefit from legislation passed in Pennsylvania that will allow for alternative rate making.

NextEra (NYSE:NEE)

NextEra is rated a "hold" on the Street and trades at respective 13.1x and 12.2x past and forward earnings with a dividend yield of 3.7%. It has a beta of 0.6.

Consensus estimates for NextEra's EPS forecast that it will grow by 3.2% to $4.53 in 2012 and then by 9.5% and 4.4% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $4.92, the rough intrinsic value of the stock is $68.88, implying 14.2% upside. The firm yielded a 16.3% y-o-y return in the recent fourth quarter. Investments in power and efficiency, in particular, paid off at FPL.

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