We have maintained our Neutral recommendation on Edison International (EIX) on Dec 13, 2013.
Why Kept at Neutral?
Our reiteration was based on the inherent business strength of its regulated utility Southern California Edison (:SCE), third quarter results and an improved outlook, partly tempered by the shutdown of nuclear plants, low hedging exposure and regulatory risk.
Edison International’s third quarter earnings were well ahead of the Zacks Consensus Estimate by 17.4% and the year-ago profit level by 42.0%. The upside was driven by robust cost management initiatives along with favorable tax benefits.
Specifically, SCE’s adjusted earnings increased 31.5% buoyed by higher rates under the company’s 2012 General Rate Cases (GRC) implemented in Nov 2012 and tax benefits. With a forward-looking regulatory backup allowing the utility to file its GRC for three years, SCE has witnessed a sharp rise in its regulated rate base in recent times.
In its third quarter earnings call, the company lifted its core earnings per share guidance to the range of $3.60–$3.70 from the previous expectation of $3.25–$3.45 for 2013. Its improved outlook reflects new assumptions about income taxes and lower operating and maintenance costs. It has also updated its basic earnings to $2.50–$2.60 from its prior target of $2.22–$2.42 per share.
Edison generates more than 80% of revenues from its regulated utility assets. Just as rate sanctions from regulatory bodies like CPUC and FERC will boost the company’s top line, any adverse verdict can dent its bottom line.
Again, the nuclear industry is witnessing a difficult year, given the availability of low-priced natural gas and the government-subsidized wind sector. Meanwhile, the permanent shutdown of Units 2 and 3 of its San Onofre Nuclear Generating Stations (“SONGS”) in California worsens the situation. Moreover, the closure of the San Onofre units will make the Diablo Canyon plant on the Central Coast California's lone nuclear plant.
The Zacks Consensus Estimate for the fourth quarter currently stands at 66 cents a share, with an expected 62.6% year-over-year decline. However, no movement was noticed in the last 7 or 30 days. For 2013, the Zacks Consensus Estimate is pegged at $3.64 per share, and has not shown any movement over either 7 or 30 days.
Other Stocks to Consider
Edison International presently retains a Zacks Rank #2 (Buy). Stocks that are also worth considering in the space are Zacks Ranked #1 (Strong Buy) Westar Energy, Inc. (WR), and Zacks Ranked #2 (Buy) The AES Corp. (AES) and Alliant Energy Corporation (LNT).