We maintain our Neutral recommendation on CMS Energy Corporation (CMS). The company has regulated electric power operations in Michigan that generate a relatively stable and growing earnings stream.
CMS Energy plans to spend approximately $6.6 billion in the next five years on upgrading its distribution system and generation assets. With its robust pipeline of regulated investment opportunities and favorable regulatory treatment, the company remains on track to achieve its long-term earnings per share growth target of 5% to 7%.
Also, the company’s focus on cost management by reducing its operations and maintaining costs by 4% this year and cutting down the number of employees by 3% would boost its profits. Overall, the company’s balance sheet and its trend of rewarding shareholders by returning a substantial portion of free cash flow through incremental dividends over the past three years makes the stock attractive.
However, we remain concerned about the unfavorable macro backdrop, lower demand for electricity and regulatory cases. This includes lackluster electricity sales growth that could hamper the company’s earnings prospects. Going forward, lower demand due to a tepid economy could significantly affect retail sales, as well as industrial sales volume. According to the U.S. Bureau of Labor Statistics, Michigan’s unemployment rate in June 2012 was 8.6% versus the national unemployment rate of 8.2%.
The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.
Jackson, Michigan-based CMS Energy Corporation (CMS) is the holding company of Consumers Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers is an electric and gas utility company that provides electricity and natural gas to Michigan’s residents, and serves customers in all 68 counties of Michigan’s Lower Peninsula. Enterprises, through its subsidiaries and equity investments, is engaged primarily in independent power production.
Some of its main competitors are Ameren Corporation (AEE) and Pepco Holdings, Inc. (POM).
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