2 Electric Utility Picks In A Transforming Sector
The electric utility industry is in the middle of a big transformation, with companies moving away from coal to natural gas to reduce emissions while adopting technologies that are changing the ways people use and manage energy.
Those who want to get a fix on what’s happening in the sector travel every fall to the Edison Electric Institute’s annual conference, which is attended by company executives, investment bankers, industry analysts and investors. The conference wrapped up this week in Orlando and a few analysts weighed in on what they heard.
Neel Mitra and Kevin Vo, analysts at Tudor, Pickering, Holt & Co., published a detailed report Friday on companies’ presentations. Their conclusion: That diversified utilities Exelon Corp. and Public Service Enterprise Group Inc., or PSEG, have the most momentum going into next year given the high likelihood of increased power prices via market reform.
The analysts said Exelon – led by CEO Chris Crane – continues to trade at a significant discount to PSEG, but they believe the tailwinds are strong enough for it to close the 1.5- to 2-turn valuation gap.
Those tailwinds include Exelon’s progress on raising return-on-equity ratios across its utilities and regulatory efforts to boost the economics of its nuclear power producing unit ExGen, which is already a free cash flow-producing “machine,” they said. The analysts have a buy rating on the company’s stock, which recently traded at $41.32 per share.
PSEG, meanwhile, deserves high marks for being able to extend and build onto its utility growth but the stock has already baked in the positive attributes, TPH said.
However, the analysts think that with the potential of New Jersey nuclear legislation and constructive price formation reform at regional electricity grid PJM, the stock will continue to trade upward despite its healthy valuation. TPH has a hold rating on the stock, which recently traded at around $50.44.
The analysts also have a buy rating on Edison International, which they say has “an incredibly long runway” for capex/earnings growth driven by an aging infrastructure and California’s legislative push to