Analyst Actions: Credit Suisse On Electric Utilities; Downgrades Pepco Holdings

By Staff,

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Credit Suisse says: "The Utility Valuation Question Again...Could 20x be the new 17x and Other Issues; DOWNGRADING Pepco Holdings ( POM ) 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 ( D ), CMS Energy Corporation ( CMS ), American Electric Power Company, Inc ( AEP ), Duke Energy ( DUK ), DTE and Edison International (EIX).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing Commodities
Referenced Stocks: AEP , CMS , D , DUK , POM

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