Progress Energy (PGN) Showing Sustainable Dividend-Yield And 2010 Valuation Seen As A Discount, According To Senior Energy Analyst
May 4, 2010 - The Wall Street Transcript has just published Alternative Energy and Utilities Report offering a timely review of the Energy sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Nathan Judge is a Founding Partner of Atlantic Equities, a London-based equity research firm focused on U.S. equities for European investors. Prior to Atlantic Equities, he worked at Cazenove, Goldman Sachs and Lehman Brothers in equity research, covering several industries, including utilities. Mr. Judge graduated from Texas Christian University in 1996 with a double degree in accounting and finance.
TWST: As you look at the industry, which names are attractive to you at this point?
Mr. Judge: There are a couple of companies, again depends on your time and your risk tolerance. And we like names across the group, as we view and rate companies relative to other utilities. As I've highlighted before, we are not particularly that constructive on utilities at the moment, although I think we're coming to a period of time later in this year that will be very positive for utilities. But we still are not recommending people to dive head first into utilities generally. When looking within the group, we see names like Exelon (EXC), which we think has a huge opportunity in taking advantage of some of the environmental points that's being driven by the EPA and their leverage to increased use of fuels by emerging markets. If China continues to buy more coal and coal prices rise, then they are very leveraged to that. They also are an interesting way of playing an industrial recovery because they are in an area that has been depressed from declining manufacturing. And given that their demand comps are very easy, it's easier to see how they grow in the future. We also like American Electric Power Compan (AEP) on the regulated side.
We think their plans for developing transmission remain very attractive. We like their diversification of regulation amongst many utilities and are not dependent any one particular jurisdiction for sustaining their earnings. And their valuation appears to be at a discount. We like Progress Energy (PGN) as well in the regulated space. Their dividend yield, in our view, is sustainable. And the market remains very hesitant about their dividend, given some of the issues that are going on with their regulators in Florida. We don't see those challenges persisting forever and given their discount, we think that that's an interesting name for lower-risk investors. On the higher-end level of risk, we look at Public Service Enterprise Group (PEG) as being very interesting at these levels as well. They are going through a rate case and we expect that there will be a fairly constructive outcome in their rate case in the near term. We like Constellation Energy (CEG) as well, as we believe there will be a fundamental re-rating of their supply business when they successfully buy up merchant gas assets at a steep discount to replacement cost.
TWST: So those are some names to look at, even though in general your feeling is this is not quite the time?
Mr. Judge: Yes, it's a good way to put it.
TWST: What's the risk in the space? Is it still the general economy?
Mr. Judge: I think that the biggest risk near term is what interest rates do. There is a question out there, has the economy or has the government taken on too much debt, which is going to result in higher interest rates without any associated economic recovery or some type of development of stagflation? I don't know if stagflation transpires, and it would appear to some to be years away. But nonetheless, I think that's the risk if we tend to see interest rates really start to move higher. Generally, investors really just don't want to be in utilities at the moment due to interest rate risk. The other risk longer term is if power prices just don't recover to reasonable levels because demand remains weak or we have a huge surplus of natural gas that just continues to flood the market, or the Chinese economy begins to falter or because of political infighting and indecision put a muzzle on the EPA. In that case, you may have a situation where deregulated companies continue to see very challenging levels of earnings for a sustained period of time. And I think that's kind of what's being priced in, but there is a risk that it actually transpires, leading to languishing stocks for some time.
TWST: There's a good chance it will happen, knowing our government.
Mr. Judge: Well, I'm more of an optimist than that because if that happens, then frankly most investors need to probably choose other markets than the U.S.
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