Shares of electricity and natural gas provider Exelon Corporation (NYSE: EXC) have underperformed peers by more than 15% since the start of 2019, and investors should buy the dip, according to Morgan Stanley.
Stephen Byrd upgraded Exelon from Equal-weight to Overweight with a price target lifted from $56 to $60.
Exelon continues to face multiple headwinds, especially in the form of a broader federal investigation into utility lobbying activity in Illinois, Byrd said in a Tuesday upgrade note. (See his track record here.)
The stock is now trading at a level that is "too cheap to ignore" in light of the following, the analyst said:
- Large free cash flow.
- Margin stability from contracted payment streams.
- The potential for higher EBITDA and greater stability from legislation in Illinois that could add $4 per share in value.
From a valuation perspective, the company's core utilities business is worth $42 per share, and this implies that at current levels, the ExGen merchant power business is valued at $3 per share, Byrd said.
A more realistic valuation is $18 per share, as the business should generate close to $7 billion in unlevered free cash flow through 2022, he said.
Exelon stock offers a potential 32% return along with a 3.2% dividend yield, which implies a "highly attractive" risk-reward profile, according to Morgan Stanley.
Exelon shares were up 2.2% at $46.69 at the time of publication Tuesday.
Goldman Upgrades Exelon, Says It's Otherwise Cautious On Energy Group
Wells Fargo Turns Bullish On Exelon, Cites Legislative Tailwinds For Nuclear Energy
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