DPL Powers Toward a Buy Rec
DPL, Inc. (DPL) continues to benefit from its stable regulated electric power operations. In 2007, the company sailed smoothly on higher retail rates and volumes coupled with increased wholesale and RTO ancillary revenue.
Moreover, the liquidation of the company's investment portfolio provides sufficient capital for expanding the utility's operating base, reducing debt and interest expense, buying back stock and/or increasing the dividend. However, increased purchased power costs, ongoing investigations by the SEC and the IRS, and uncertainty over the successful allocation of new capital toward greater earnings power remain concerns.
Price appreciation to our near-term valuation target, coupled with the recently increased $0.275 per share quarterly cash dividend -- which we deem sustainable and secure represents -- annualized total return potential of 27.5%. Going forward, investors may take comfort in management's strategic shift toward stable regulated utility operations and away from volatile unregulated businesses.
We also note the optimistic signal implied in the company's reinstatement of, and subsequent increase in, its quarterly dividend, which currently yields a relatively attractive 4.3%, which is above the electric power utility industry average yield. Again, the sustainability of the dividend is supported by cash inflow generated by the sale of the company's private equity funds as well as reasonable projected earnings payout ratios. As of the date of this report, DPL trades at 12.8x and 11.1x, respectively, our 2008 and 2009 earnings per share estimates, or at a discount to its diversified energy utilities peers.
Meanwhile, relative sales, cash flow and book value multiples indicate DPL valuations at the upper-end of the range of its comparable competitors. Given our preference for share price multiples of operating earnings relative to comparable multiples of a company's peers, combined with above industry average long-term earnings growth expectations, forecasted year-over-year EPS through 2009, a competitive dividend yield and continued consolidation in the utilities sector, we upgrade our recommendation on DPL common stock to BUY with a six-month target price of $28.25. Our near-term target price represents current-year 2008 P/E multiple equivalent to the electric utility industry multiple of 14.2x and 13.3x our 2009 EPS estimate.
Macro Environment Challenges AXA
We are maintaining our Hold recommendation on AXA Group (AXA) after the year-end results. Most business units are performing well, and AXA is expected to continue its momentum in 2008. However, the macro environment at the start of 2008 has been challenging and compared to its peers, AXA is fairly valued. Our six-month target price is $36.00.
In the current environment and assuming equity markets stabilize at current levels, AXA believes it can achieve positive revenue and underlying earnings growth in 2008.
