On Apr 5 we downgraded our recommendation on Integrys Energy Group (TEG) to Neutral from Outperform. The diversified utility service provider presently carries a Zacks Rank #3 (Hold).
Why the Downgrade?
The primary concern which led to the lowering of our recommendation was the uncertainty regarding the outcome of several rate cases associated with Integrys’ subsidiaries.
In addition, the company reported negative earnings surprises in three of the last four quarters. Over the past two months, the Zacks Consensus Estimate for the first quarter 2013 slid by 2.44% to $1.60 per share from $1.64 per share.
Cause of Concern
Integrys’ operations are significantly impacted by variance in weather conditions. Changing weather patterns lead to fluctuations in demand and hence affect sales of the company. In fact, weather irregularities hurt 2012 earnings by 40 cents per share.
The volatility in market prices of coal and natural gas could also impact Integrys’ margins. The slow recovery of the U.S. economy also hinders the company’s growth trajectory with energy prices still remaining weak.
Besides, marketability of Integrys’ generation business is reliant on third party transmission facilities. This makes its operations vulnerable to any disruption befalling these third-party systems.
On the other hand, we believe Integrys’ power contract win from the Chicago government, increasing focus on infrastructure modernization and a solid asset portfolio are anticipated to counter the above negatives.
Other Stocks to Consider
While we hold a modest outlook for Integrys Energy in the upcoming quarters, other utility companies worth a look are Brookfield Infrastructures Partners L.P. (BIP), Pike Electric Corporation (PIKE) and Empresa Nacional Electricidad SA (EOC). All the above currently carry a Zacks Rank #1 (Strong Buy).Read the Full Research Report on BIP
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