Allegheny Energy Energized
Going forward, Allegheny Energy, Inc.'s (AYE) positive investment factors include growing earnings, increased market prices, higher generation rates in Pennsylvania, transmission expansion and increased coal-hedged position.
These positive factors are partially offset by higher coal costs and reduction in plant output. We expect that the company's regulated delivery utility business will provide steady earnings growth, while the generation business will provide an additional boost to earnings.
Accordingly, we maintain a Buy recommendation on AYE common stock with a six-month target price of $51.75. Price appreciation to our near-term valuation target, coupled with the reinstated regular quarterly cash dividend of $0.15 per share after a gap of five years, which we deem sustainable and secure, represents annualized total return potential of 26.5%.
The company successfully reduced its long-term debt from a high of $5.1 billion at year-end 2003 to $4 billion after the first half of 2008. Allegheny Energy accordingly received investment-grade credit ratings from S&P, Fitch and Moody's. The company currently has a series of transmission expansion plans as well as plans to engage in wind energy.
Allegheny Energy's scrubber projects at the Hatfield and Fort Martin power stations remain on schedule and within budget. Construction at Hatfield and Fort Martin scrubbers completed 75% and 40%, respectively, after the first half of 2008.
The company also recently received favorable regulatory rulings. In May 2008, the Virginia State Corporation Commission granted an interim rate increase on behalf of the request made by the company's subsidiary Potomac Edison in April 2008. Also in July 2008, the Virginia State Corporation Commission allowed a $73 million rate increase beginning July 1, 2008, pending a final October 2008 hearing.
SunPower a "Hot" Green Play
The fortunes of SunPower Corp. (SPWR) appear greener given the very high growth potential in the alternative energy industry and specifically solar power energy, with higher captive generation of panels, declining silicon cost and assured silicon supply until 2010.
In addition, a new solar cell-manufacturing facility in Malaysia, expansion into the Italian market and a recent agreement with FPL for the photovoltaic power plants in the USA, adds visibility to the story. Also, cheaper poly-silicon supply contracts and thinner wafers are improving the solar cell and panel production overheads. Thus we maintain our Buy recommendation on SPWR common stock with a six-month target price of $98. Price appreciation to our near-term target price represents 15.6% upside potential.
The company believes that its solar cells have the highest conversion efficiency available for the mass market. SunPower's proprietary all back-contact solar cell design results in conversion efficiencies up to 50% higher per unit area than conventional solar cells. The management believes that SunPower solar panels appeal to residential and commercial customers seeking more aesthetically appealing solutions, because all electrical contacts are located on the back of the company s solar cells, they have a uniformly black appearance that allows SunPower solar panels to blend into customers' rooftops.
As of this report, SPWR Class A Common Shares trade at 50.8x our 2008 earnings per share estimate and 24.3x our 2009 EPS estimate, representing a valuation at the upper-end of the range of comparable public companies in the alternative energy industry, yet such a premium is justifiable given SunPower's above average growth potential.
Guess' Beats, Outlook Cautious
Guess' Inc. (GES) reported strong results for the second quarter of fiscal 2009. It reported sales of $515 million and EPS of $0.57, easily beating consensus estimates. Despite the huge upside in the second quarter, the management's full-year guidance wasn't all that bullish.
Guess now expects sales of $2.06-$2.11 billion and EPS of $2.47-$2.53, which was up from its previous guidance of $2.03-$2.08 billion and EPS of $2.40-$2.48. The management is typically cautious with its guidance. Even so, the company is experiencing its strongest growth in parts of the world where economic growth is slowing. We would not chase the shares here.
Guess shares are currently trading at 15.1x our fiscal year 2009 EPS estimate and 13.0x our fiscal 2010 EPS estimate. GES trades at a slight premium to its peer group based on price-to-earnings, price-to-book, price-to-sales, and price-to-cash flow.
