Investors' Soapbox AM | THURSDAY, APRIL 18, 2013
Six Top Picks in Electric Utilities
Credit Suisse likes Edison International, DTE, CMS and three others.Article Comments (1)
We are updating our estimates and raising our target prices on electric utilities to reflect the various 10(k), analyst day and other modeling adjustments as well as rolling forward of our rate-of-return methodology to the 2013-2016 earnings-per-share growth rate, expanded target multiple to 16 times (was 15 times) and lower discount rate of 7.0% (was 8.0%).
Our take: Utilities still look "buy-able" even from current levels as we look at a range of valuation screens although the valuation upside is not as big at this point as when we first raised the idea of 17 times being the new 12.5 times. We can see how 20 times could be the new 17 times but ultimately think 18 times-19 times is a more "justifiable" conclusion today.
We are raising our regulated utility target prices by about 5% to 20%, using our rate-of-return valuation methodology where we use a longer-term price/earnings multiple of 16 times (was 15 times), which is still below levels we think are justifiable today.
We still think the basic investment thesis for regulated utilities holds up: 4% to 5% EPS growth, 4% dividend yields, and 0.5 times-0.7 times beta create a high-single digit (or better) annual return in a low-risk package.
We like utilities with good growth and regulatory protections that support better growth, favoring: Dominion Resources (ticker: D); CMS Energy (CMS); American Electric Power (AEP); Duke Energy (DUK); DTE Energy (DTE); and Edison International (EIX).
-- Dan Eggers
-- Kevin Cole
-- Matthew Davis
-- Katie Chapman