Market Neutral on ConEd Shares
Stable, regulated utility operations, a strong balance sheet, regulated rate increases, earnings from non-regulated businesses and an increased dividend payout collectively make Consolidated Edison, Inc., a.k.a., ConEd (ED) a conservative income-based investment story. However, concerns relating to future electricity sales growth and increasing capital expenditures continue to restrain valuation.
Accordingly, with a mixed outlook, we maintain our market-neutral Hold rating on ED common stock with a six-month target price of $43. Despite the mixed outlook for ConEd, in our view, we believe ED stock will attract conservative investors seeking a very competitive 5.7% dividend yield with modest EPS growth.
As of this report, ED trades at 12.9x both our 2008 and 2009 earnings per share estimates, or at a moderate discount to its comparable regulated energy distribution utility peers and the broader electric utility industry. Such an earnings-based multiple discounts are appropriate for ED given low, yet conservative and stable, long-term earnings growth expectations.
Likewise, ED trades at the low-end of the range of its industry peers based on relative price multiples of sales and book value, yet in-line within the range of comparable public companies with respect to relative cash flow multiples.
Our target price amounts to 13.4x our current-year 2008 and forward 2009 EPS estimates. Price appreciation to our near-term valuation target, coupled with the recently increased $0.585 per share quarterly dividend which we view as sustainable and secure if modest projected earnings growth is generated as expected represents annualized total return potential of 14.5%. Income-seeking investors may be content to Hold the stock, although those seeking stronger growth should look elsewhere.
Sempra Energy Shows Stability
Sempra Energy (SRE) delivered stable performance in the fourth quarter of 2007, in spite of lower income from natural gas and synthetic fuel tax credit operations. Strong performance was driven by its commodities business and supported by earnings accretive asset sales.
Looking ahead, its joint venture with
Royal Bank of Scotland (RBS), conclusion of general rate cases, operational REX-West, and commissioning of LNG facilities support our bullish outlook. Furthermore, from a base of stable earnings via customer growth and higher electricity sales, combined with impressive results at Sempra Generation and new solar power contracts, will aid in consistent growth in earnings.
Impressive operating and financial results in 2006 and 2007, driven by excellent cash flow from non-core asset sales at Sempra Generation and supported by solid results from utility operations, form the basis of our bullish outlook on SRE. As of this report, SRE common stock trades at only 13.7x and 11.9x, respectively, our 2008 and 2009 earnings per share estimates, or at a moderate discount to the natural gas distribution industry yet more in-line with some of its more comparable public companies.
We attribute the stock's current earnings-based discount valuation to the uncertainty surrounding the lack of visibility into regulatory proceedings, declining business from the company's natural gas operations, as well as a below-industry average dividend yield. Nevertheless, as the former two risk-related issues are resolved, SRE's discount relative to its industry peers should narrow, as its multiple expands.
Meanwhile, the stock trades roughly in the middle of the wide range of industry multiples of sales, cash flow and book value. Moreover, with a recent 3.2% dividend hike and projected payout ratios of only 35% of our 2008 EPS estimate and 30% of our 2009 EPS estimates, there is clearly room for additional dividend increases. Looking ahead, from a base of relatively stable earnings via higher electricity sales and customer growth, we see earnings growth through 2009 driven by impressive profitability at SDG&E, FERC approval of the Rockies pipeline project, the joint venture with the RBS and additional asset sales.
Accordingly, we maintain a Buy recommendation on SRE with a six-month target price of $59.50, or 14.8x our 2008 EPS estimate and 12.8x our forward 2009 estimate.
