Utility equities are expected to increase in value in the next few years, as investors get past the current near-trough in valuation. The inflection point is expected to come after investors get clarity regarding EPA regulations and macroeconomic performance, says Ali Agha, Managing Director of SunTrust Robinson Humphrey.
“One area of interest would be companies that currently have less of a commodity exposure, but have a stronger regulatory presence following the theme that growth in rate-base investment through the capital expenditure program will ultimately lead to growth in earnings, coupled with decent dividend yields,” Agha said.
Agha recommends Edison International (EIX), a generator/distributor of electric power and an investor in infrastructure and energy assets. He says he likes EIX because it is a hybrid utility with a strong growth profile for its regulated utility arm, and on their merchant power side, some restructuring opportunities that may create value.
“From a valuation perspective, if you assume that in this market environment the merchant power operation is worth zero, and that’s the value that we assigned to it because that’s the worst case scenario in our view, then the regulated utility is trading at about a 17% to 18% discount to other regulated utilities,” Agha said.
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