Now that winter is just around the corner, we address how utilities may be a wise investment choice, especially in such a turbulent market. Zacks senior utilities industry analyst
Jon Kolb helped give us some suggestions in this regard.
Are you seeing some favorable signs within the utilities group, now that home heating season has begun?
Recently, I have issued Buy reports on two regional utilities:
DPL Inc. (DPL) and
Edison International (EIX).
OK, let's start with DPL. What can you tell us about this company?
DPL sells electricity through its two principal subsidiaries: Dayton Power and Light Company (DP&L) and DPL Energy, LLC. The company continues to benefit from its stable regulated electric power operations. The first half of 2008 saw gains on sale of emission allowances, successful completion of the scrubber project, higher rates mainly in the retail and wholesale segments, focus on debt reduction, and higher generation output.
However, increased purchased power and fuel costs, renewable energy thrust in the new Ohio electric energy bill and uncertainty over the successful allocation of new capital towards greater earnings power remain a concern.
So how do you come up with your Buy rating, ultimately?
We maintain a BUY recommendation on DPL common stock with a six-month target price of $25.00. Price appreciation to our near-term valuation target, coupled with the increased $0.275 per share quarterly cash dividend, which we deem sustainable and secure, represents annualized total return potential of 34.3%.
DPL owns approximately 950 megawatts (MW) of peaking generation and 2,800 MW of coal-fired generation. DP&L is an electric utility with more than 515,000 residential, commercial, industrial, and governmental customers in its 6,000 square-mile service area of west-central Ohio.
Our near-term target price of 13.1x 2008E EPS approximates the current-year 2008 P/E average industry multiple adjusted upward for higher growth expectations.
What do you see that is favorable about Edison International?
Consistent projected core earnings growth over the remainder of 2008 and fiscal 2009, driven by improved performance in unregulated power generation and energy trading, a solid base of stable utility operations, higher price realizations, ongoing alternative energy projects, balance sheet strength, and a relatively cheap earnings-based valuation, partially offset by volatile gas prices, regulatory risk regarding rate hikes and recovery of capital expansion costs, collectively support our bullish outlook for Edison International.
Accordingly, we maintain our BUY recommendation on EIX common stock with a six-month target price of $37.50. Price appreciation to our near-term valuation, coupled with the stock's $0.305 per share quarterly dividend, which we view as very sustainable and secure given low projected payouts, represents annualized total return potential of 38.4%.
