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Southern Co: Buying Opportunity As Pullback Overdone

 November 13, 2012 10:01 AM
 


(By Mani) Shares of Southern Co. (NYSE: SO) are down 7 percent month-to-date versus its defensive utility peers down 4.2 percent and the S&P 500 down 1.3 percent, driven by lower than expected third-quarter earnings.

Atlanta, Georgia-based Southern is currently the largest utility by market cap at $37 billion. It operates through four utilities in Alabama, Florida (Gulf Power), Georgia, and Mississippi as well as Southern Power, a merchant generator. Georgia Power and Alabama Power are the two largest utilities, accounting for 48 percent and 36 percent of consolidated earnings, respectively.

For the third-quarter, the company reported net income of $976 million or $1.11 per share for the third quarter, higher than $916 million or $1.07 per share in the prior-year quarter. Analysts expected earnings of $1.13 per share for the third-quarter. Revenues for the quarter declined 7 percent to $5.05 billion and missed five Wall Street analysts' consensus estimate of $5.97 billion.

[Related -The Southern Company (SO): The Wait For Fair Valuation Is Over]

"While utilities as a whole are taking a beating, we believe that Southern remains one of the better quality stocks in our coverage universe," RBC Capital Markets analyst Shelby Tucker wrote in a note to clients.

While the near term could prove a little challenging due to the slow economy, the utilities have a number of mechanisms that should allow them to earn their allowed returns over time.

"Despite a slowdown in the Southeast region, where Southern's utilities operate, we expect the company to deliver about 5% EPS growth and 4% dividend over time," Tucker said.

[Related -Utilities - Today's Best Bond Alternative]

Lost amid the national election scene was the re-election of Public Service Commissioners Stan Wise and Chuck Eaton in Georgia. Both have a long history of supporting economic development in the state and view Georgia Power as an integral player in achieving that goal.

The same can be said about Alabama, where Republican Twinkle Cavanaugh defeated Democrat Lucy Baxley for the position of President of the PSC.

Some investors fear that the lack of Republican gain in Congress strengthens the hand of the White House to push for a higher tax rate on dividends.

"We had indicated earlier this year that a return to ordinary income taxable would have a negative impact of 6% to 8% on utility stocks, part of which we believe is being felt now," the analyst noted.

Meanwhile, utilities are still better shelter from the "Fiscal Cliff". There is no denying of the fact that utilities are not likely to be spared if the fiscal cliff is not resolved promptly, but the market could fare worse.

"As such, we believe that holding some high quality utilities in a diversified portfolio makes sense despite the group's higher valuation. We believe that Southern is one of those names that can lower a portfolio risk profile," Tucker said.

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