Credit Suisse says: "The Utility Valuation Question
Again...Could 20x be the new 17x and Other Issues; DOWNGRADING
Pepco Holdings (
) to UNDERPERFORM (from Neutral); Revising Ests & TPs."
"We are updating our estimates and raising our target prices to
reflect the various 10K, Analyst Day and other modeling adjustments
as well as rolling forward of our Rate of Return methodology to the
2013-2016 EPS growth rate, expanded target multiple to 16x (was
15x) and lower discount rate of 7.0% (was 8.0%)."
Our take: "Utilities still look 'buy-able' even from current
levels as we look at a range of valuation screens although the
valuation upside is not as big at this point as when we first
raised the idea of 17x being the new 12.5x. We can see how 20x
could be the new 17x but ultimately think 18-19x is a more
'justifiable' conclusion today, which we frame out below and then
in detail in our full slide deck.
"We are raising our Regulated Utility target prices by ~5-20%,
using our Rate of Return valuation methodology where we use a
longer-term P/E multiple of 16x (was 15x), which is still below
levels we think are justifiable today.
"We still think the basic investment thesis for Regulated
Utilities holds up: 4-5% EPS growth, 4% dividend yields, and
0.5-0.7x beta create a high single digit (or better) annual return
in a low risk package. We like Utilities with good growth and
regulatory protections that support better growth, favoring
Dominion Resources, Inc (
), CMS Energy Corporation (
), American Electric Power Company, Inc (
), Duke Energy (
), DTE and Edison International (EIX).