Credit Suisse Weighs In on TransCanada (TRP) Amid Activist Rumors

Credit Suisse earlier maintained a Neutral rating on TransCanada Corporation (NYSE: TRP) with a price target of $58. Rumors yesterday said Dan Loeb and several hedge funds are reviewing the company as a potential breakup candidate. In response, the company said today it is "committed to the ongoing enhancement of shareholder value including continuous evaluation of the company's approach to capital allocation."

Commenting on developments, analyst Andrew M. Kusk of Credit Suisse said, "Simply, actions by others in the broader pipeline sector, namely Spectra and Williams, led to considerable debate regarding business models over the last six months. As published in our July 28 note, we regard the Canadian large cap pipes approach to certain issues as being akin to Aesop's Tortoise and Hare fable with most of the US contingent being the hare. In our view, TRP can create greater value, however, this process is evolutionary versus revolutionary."

"Currently, high cash flow payout models tend to benefit from robust valuations versus more growth-oriented companies with lower payouts. Notably, most of those higher cash flow payout ratios models lack organic growth and, among other things, often have substantial external common equity needs. Usually, these models work in low rate environments and at a time when capital markets are open with easy access. Yet, as we have seen in prior cycles, these conditions seldom persist for even the planning stage of big projects let alone the asset life of infrastructure assets," he continued. "We don't foresee radical changes, but greater clarity about the prior dropdown plan may aid valuation. We believe TRP has some latitude on cash flow payouts in the near-term given project approval delays, but do not believe a high payout model is prudent given the capital program."

For an analyst ratings summary and ratings history on TransCanada Corporation click here. For more ratings news on TransCanada Corporation click here.

Shares of TransCanada Corporation closed at $55.52 yesterday.

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