We have downgraded our recommendation on Entergy Corp. (ETR) to Neutral from Outperform on Jan 28, 2014. The company currently has a Zacks Rank #3 (Hold).
Why the Downgrade?
The downgrade was based on the negative verdict from the Mississippi Public Service Commission (:MPSC) related to the proposed spin-off of Entergy Mississippi's electric transmission business and its subsequent merger with a subsidiary of ITC Holdings Corp. (ITC). MPSC rejected the transaction on the ground that it is not going to be a lucrative move for Mississippi customers. The approval of the deal would lead to an increase in the electricity rate for Mississippi customers by $300 million over 30 years.
Going back, in Dec 2011, Entergy had entered into a definitive agreement with ITC Holdings to sell its electric transmission business to the latter for approximately $1.8 billion.
Per the agreement, Entergy would have divested its electric transmission business to a newly formed entity known as Mid South TransCo LLC ("Transco"). Post merger, Entergy was supposed to have an approximately 50.1% stake in ITC Holdings in exchange for their shares in TransCo. The existing shareholders of ITC Holdings would have held the remaining 49.9% stake of the combined entity.
Entergy intended to utilize a major part of the cash proceeds from the transaction to redeem debt. Apart from boosting its earnings, the transaction would have allowed the company to focus more on its power generation and distribution businesses.
Despite the negative sentiment from the proposed merger denial, we believe Entergy is well positioned on the strength of its geographically-diversified mix of regulated and merchant operations. This insulates the company from regulatory bottlenecks and power-price volatility in any particular region, helping the company to achieve its targeted annual compound earnings growth of 6% in the next five years.
Stocks to Consider
Stocks in the industry that are worth the pick include Zacks Ranked #1 (Strong Buy) National Grid plc (NGG) and NRG Yield, Inc. (NYLD).