We are maintaining our Neutral recommendation on Northeast Utilities (NU). The company currently has a Zacks Rank #2 (Buy).
Why the Reiteration?
The reiteration is primarily based on risks associated with Northeast Utilities’ over-reliance on transmission and distribution businesses, delay in several important projects, and stringent regulations. However, we consider the company’s diversified asset base and solid project pipeline as catalysts, which can mitigate these negatives.
The performance of utility providers like Northeast Utilities primarily depends on their ability to manage their transmission and distribution businesses. Northeast Utilities’ regulated businesses contributed substantially to its total earnings in 2012. Transmission and distribution businesses sometimes face several operational risks including breakdown and failure or damage of equipments or processes, which affect the company’s operations and increase operating costs.
On the positive side, Northeast Utilities completed its merger with NSTAR in Apr 2012 and enjoyed related benefits in the fourth quarter of 2012. The company’s quarterly revenues surpassed the year-ago figure on the back of strong performance from its transmission segment primarily driven by this merger. We believe that the NSTAR-merger will allow Northeast Utilities to increase its scale of operations and widen customer base.
As far as organic growth strategies are concerned, Northeast Utilities invested $1.47 billion in 2012 under the infrastructure spending program for its several expansion and development projects. These initiatives will allow the company to increase its transmission capacity, which will subsequently help to meet rising demand. Later, this will provide the company attractive earnings and cash flow over the couple of years.
Over the past two months, the Zacks Consensus Estimate for first-quarter 2013 increased 1.6% to 65 cents per share. The Zacks Consensus Estimate for full-year 2013 earnings currently stands at $2.55 per share, up 12.06% year over year primarily attributable to lower interest costs and operating and maintenance expenses.
Other Stocks to Consider
Other stocks from the industry that are presently performing better include Brookfield Infrastructure Partners L.P. (BIP), Empresa Nacional de Electricidad S.A. (EOC) and Pike Electric Corporation (PIKE). All the three stocks carry a Zacks Rank #1 (Strong Buy).
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