Credit Suisse Very Mixed on Utilities Outlook Despite the Recovery

Credit Suisse has shown a very mixed report on its coverage of utilities on Tuesday. We have seen one very positive call on Northeast Utilities (NYSE: NU), followed by caution in Exelon Corp. (NYSE: EXC), Entergy Corp. (NYSE: ETR) and FirstEnergy Corp. (NYSE: FE).

Northeast Utilities (NYSE: NU) was started as Outperform with a $47 price target. The stock was at $43.32 prior to the call, and the consensus analyst price target from Thomson Reuters is slightly lower at $46.14.

Credit Suisse’s Kevin Cole called Northeast a unique investment opportunity with good earnings visibility through its rate case stay-outs to the middle of this decade, which are also supported by cost cuts from the company along with real-time recovery on FERC transmission investment and with nearly half of its rate base growth. Northeast also was said to be one of the few utilities that offer investors limited ability to disappoint over the medium-term, and the firm has projected 6% to 9% earnings per share growth through 2015 and 3% to 7% earnings per share growth thereafter.

Three other utilities were given negative calls from Credit Suisse’s Dan Eggers. He said that he still sees downside risk to integrated stock prices, with targets showing about 10% downside. This is based on weak business fundamentals and a perspective that current valuations still do not support where the stocks trade.

Entergy Corp. (NYSE: ETR) was maintained Neutral and its price target was lowered to $62 from $65 in the call. Exelon Corp. (NYSE: EXC) saw its price target lowered to $25 from $28, while only a Neutral rating was maintained. FirstEnergy Corp. (NYSE: FE) was maintained as Neutral but its target price was cut to $34 from $37, versus a $37.82 closing price. Here are the dividend yields for the utilities covered:

  • Northeast Utilities (NYSE: NU) has only a yield of 3.4%.
  • Exelon Corp. (NYSE: EXC) yields 4.4%.
  • Entergy Corp. (NYSE: ETR) yields a high 4.9%.
  • FirstEnergy Corp. (NYSE: FE) yields the most of the four, at 5.8%.

The call was positive enough on Northeast Utilities that investors should expect dividend hikes ahead. The current quarterly dividend payout of $0.367 would have to be raised to $0.43 just to round up to a 4% dividend yield.

What is interesting about the utility sector is that the pushing out of the bond tapering by the Federal Reserve has acted to keep interest rates lower. That in turn has offered handy support for the utility sector, due to the sector’s intense long-term capital borrowing needs. The Utilities Select Sector SPDR (NYSEMKT: XLU) is near $39.25, against a 52-week trading range of $33.85 to $41.44. This is a gain of more than 6% from the lows seen in early October.

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