With its focus on electricity operations and geographically well-diversified power generation fleets, Dynegy's rationalized and consolidated asset portfolio improved visibility of its underlying earnings power. Accordingly, with a predominantly bullish outlook, we maintain our Buy recommendation on DYN with a six-month target price of $9.25, representing 16.4% upside potential.
Dynegy has been making progress in rationalizing the business portfolio and strengthening its financial health. The LS Power combination has significantly enhanced the scale and scope of the company by creating a portfolio of more than 20,000 megawatts of generation capacity. Dynegy's earnings were affected in the reported 1st quarter of 2008 by higher mark-to-market losses on account of rising forward power prices.
Initiating BOK Financial a Hold
We are initiating coverage on the shares of BOK Financial Corporation (BOKF) with a Hold recommendation. In recent years, the company has successfully expanded outside its home state of Oklahoma and broadened its non-interest income base, which represented more than 40% of revenues at year-end 2007.
Until recently, while credit quality measures had moved off its pristine levels over the past year, the metrics during 1Q08 could have been described as being better than its peers. However, considering the industry overhangs have yet to crest and the company's July 2, 2008 press release, we suspect results could be curtailed over the next year and a half.
We are installing our 2008 and 2009 earnings expectations at $3.10 per share and $3.50 per share, respectively. BOKF currently trades at 12.0 times the consensus forward estimate, a 21.2% premium to the peer group median. The current price level looks attractive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate.
BOKF's P/E-to-growth (PEG) ratio is 1.09, a 16.3% discount to the 1.30 median for the peer group. On a price-to-book basis, the 27.4% premium looks stretched given an ROE of 7.0% below median. We expect valuation metrics will improve over the next several quarter as the company reestablishes investor confidence.
As such, our $48.30 price target assumes that BOKF will trade for 1.55 times our projected book value of $31.15 per share at December 31, 2008, which also equates to 13.8 times our forward estimate at that point. We view the $0.90 per share annual dividend as being relatively secure, implying a 7.9% expected total return based on the July 8, 2008 close of $45.38 per share.
