Wells Fargo on Diversified Electrics: Brief Thoughts on Outperform-Rated Names including American Electric Power (AEP), Entergy (ETR) and FirstEnergy (FE)
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Price: $125.70 --0%
Rating Summary:
16 Buy, 13 Hold, 0 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
Rating Summary:
16 Buy, 13 Hold, 0 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
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Wells Fargo on Diversified Electrics: Brief Thoughts on Outperform-Rated Names including American Electric Power (AEP), Entergy (ETR) and FirstEnergy (FE).
1) American Electric Power (NYSE: AEP)
Note on comparison group: we include AEP in the Diversified Electric group given the company’s plan to transition its Ohio-based power plants into an unregulated subsidiary post-2014. However, AEP’s merchant business is likely to comprise a far lower percentage of the company’s annual earnings than most of the other Diversifieds (25% versus 40%+ for the peer group). In addition, we believe AEP will operate the merchant business in a more conservative manner than the peers by entering into long-term PPAs for a significant portion of the output and/or divesting assets. For these reasons, from a valuation perspective we compare AEP with the entire Electric Universe (Regulated Electrics and Diversified Electrics).
Attractive Valuation – AEP shares trade at 8-14% P/E multiple discounts relative to the Electric Universe medians on our 2012-14 EPS estimates. We believe the discount is excessive in light of positive regulatory developments in Ohio and what appears to be a sharpened focus from the management team on delivering shareholder value.
Clarity In Ohio – The Ohio PUC’s recent approval (with modifications) of AEP’s settlement agreement to transition the company’s Ohio generation fleet to a competitive model by 2015 provides much needed certainty, in our view. As a result, we believe management will be much better able to evaluate and act on longer-term strategic options for AEP’s eastern operations.
Analyst Event – AEP tentatively plans to host an analyst day in early 2012. The company is expected to provide annual EPS guidance for 2012-14 and additional metrics to better allow investors to evaluate the merchant operations.
2) Entergy (NYSE: ETR)
Attractive Valuation And Dividend Yield – Our sum-of-the-parts valuation indicates a 12-18 month valuation range of $82-84 comprised of: (1) Utility & Parent - $48/share, (2) Transmission $23.50/share and (3) Entergy Wholesale Commodities (EWC) - $10-12/share. Shares also offer a 4.5% dividend yield.
Transmission Divestiture Drives Thesis – Our positive investment thesis and sum-of-the-parts valuation ascribes a high likelihood that ETR gains the necessary regulatory approvals to merge the company’s electric transmission assets into ITC. While the state approval process will likely provide its fair share of ups and downs, in the end we believe ETR and ITC will be able to make a highly compelling case for the transaction.
Nuclear Update – Our EWC valuation reflects the mid-point of our EWC valuation range of $6-16/share. The lower end of the range assumes that Vermont Yankee and the Indian Point Nuclear units 2 and 3 cease operating in 2012, 2013 and 2015, respectively. Conversely, the upper end of the range assumes the units operate into the 2030’s. For Indian Point, we continue to believe there is a strong possibility that a settlement will ultimately be negotiated with New York that extends the life of the Indian Point units at least through the current decade.
FirstEnergy (NYSE: FE)
Enviable Environmental Position – In terms of asset mix and location, FE’s merchant generation fleet is well-positioned to benefit from increasingly stringent emission restrictions, in our view.
EPS Growth Prospects – While FE’s earnings prospects are not immune to the downturn in the natural gas markets, by our calculations the company’s EPS growth outlook remains amongst the best of the heavily power market leveraged names. Based on the current forward energy curves and capacity auctions, we see EPS bottoming in 2013 at $3.05 before materially improving to $3.55 in 2014 and $4.40 in 2015.
Dividend – "Get Paid While You Wait" – Shares offer an attractive 5.0% yield on the common dividend, which we view as secure with no growth.
1) American Electric Power (NYSE: AEP)
Note on comparison group: we include AEP in the Diversified Electric group given the company’s plan to transition its Ohio-based power plants into an unregulated subsidiary post-2014. However, AEP’s merchant business is likely to comprise a far lower percentage of the company’s annual earnings than most of the other Diversifieds (25% versus 40%+ for the peer group). In addition, we believe AEP will operate the merchant business in a more conservative manner than the peers by entering into long-term PPAs for a significant portion of the output and/or divesting assets. For these reasons, from a valuation perspective we compare AEP with the entire Electric Universe (Regulated Electrics and Diversified Electrics).
Attractive Valuation – AEP shares trade at 8-14% P/E multiple discounts relative to the Electric Universe medians on our 2012-14 EPS estimates. We believe the discount is excessive in light of positive regulatory developments in Ohio and what appears to be a sharpened focus from the management team on delivering shareholder value.
Clarity In Ohio – The Ohio PUC’s recent approval (with modifications) of AEP’s settlement agreement to transition the company’s Ohio generation fleet to a competitive model by 2015 provides much needed certainty, in our view. As a result, we believe management will be much better able to evaluate and act on longer-term strategic options for AEP’s eastern operations.
Analyst Event – AEP tentatively plans to host an analyst day in early 2012. The company is expected to provide annual EPS guidance for 2012-14 and additional metrics to better allow investors to evaluate the merchant operations.
2) Entergy (NYSE: ETR)
Attractive Valuation And Dividend Yield – Our sum-of-the-parts valuation indicates a 12-18 month valuation range of $82-84 comprised of: (1) Utility & Parent - $48/share, (2) Transmission $23.50/share and (3) Entergy Wholesale Commodities (EWC) - $10-12/share. Shares also offer a 4.5% dividend yield.
Transmission Divestiture Drives Thesis – Our positive investment thesis and sum-of-the-parts valuation ascribes a high likelihood that ETR gains the necessary regulatory approvals to merge the company’s electric transmission assets into ITC. While the state approval process will likely provide its fair share of ups and downs, in the end we believe ETR and ITC will be able to make a highly compelling case for the transaction.
Nuclear Update – Our EWC valuation reflects the mid-point of our EWC valuation range of $6-16/share. The lower end of the range assumes that Vermont Yankee and the Indian Point Nuclear units 2 and 3 cease operating in 2012, 2013 and 2015, respectively. Conversely, the upper end of the range assumes the units operate into the 2030’s. For Indian Point, we continue to believe there is a strong possibility that a settlement will ultimately be negotiated with New York that extends the life of the Indian Point units at least through the current decade.
FirstEnergy (NYSE: FE)
Enviable Environmental Position – In terms of asset mix and location, FE’s merchant generation fleet is well-positioned to benefit from increasingly stringent emission restrictions, in our view.
EPS Growth Prospects – While FE’s earnings prospects are not immune to the downturn in the natural gas markets, by our calculations the company’s EPS growth outlook remains amongst the best of the heavily power market leveraged names. Based on the current forward energy curves and capacity auctions, we see EPS bottoming in 2013 at $3.05 before materially improving to $3.55 in 2014 and $4.40 in 2015.
Dividend – "Get Paid While You Wait" – Shares offer an attractive 5.0% yield on the common dividend, which we view as secure with no growth.
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