(By Balaseshan) Deutsche Bank analyst Caroline Bone upgraded rating on shares of Northeast Utilities (NYSE:NU) to "Buy" from "Hold" and increased price target to $39 from $36.50, on introduction of new outlook following NU's recent merger with NSTAR.
The analyst sees an attractive entry point into a stock that offers above average long-term EPS and DPS growth, below average regulatory risk (no rate cases until 2014), and no need for new equity in the near-term. Despite being a larger and arguably better positioned company post-merger, NU is currently trading at a 4% discount to peers.
Through 2016, Bone expects NU to generate EPS CAGR of about 8% off a 2012 base versus peer average growth that is more likely to be in the 4%-5% range. This would be driven by investments in new transmission and the realization of NSTAR merger synergies that should allow NU's distribution businesses to earn their authorized return on equity.
Shares of the company, which engages in the energy delivery business, has been weak following FERC's decision in early May to set the New England base transmission ROE complaint for hearing or settlement.
However, Bone believes the stock is currently pricing in a more than 200 basis point reduction in the company's base transmission return on equity (ROE), an outcome that we believe is highly unlikely.
The analyst expects the company's outlook to include a long-term EPS growth target, an updated capital plan, and annual EPS guidance for 2013. Bone believes this update is likely to be a positive catalyst as it will clarify the company's long-term growth potential.
NU closed Wednesday's regular session up 2.18% at $37.