Credit Suisse says: "Closing the Valuation Gap after RPM;
UPGRADING to NEUTRAL (from Underperform); Revising Ests & TP to
$31.50 (from $32.00)."
Our Take: "We are raising our rating on PEG to Neutral from
Underperform within our relative to peer group recommendation
system. The combination of an uplift in PEG's market conditions and
deterioration for peers has effectively collapsed the valuation
discrepancy we previously saw in PEG vs the group. We are updating
our target price on PEG to $31.50 (from $32) built from our
sum-of-the-parts methodology. We are revising our 2013/2014/2015
EPS estimates to $2.47/$2.38/$2.30 (from $2.48/$2.36/$2.27)
Credit Suisse thinks investors can find comfort in PEG's
investment story through -
Utility earnings growth: "PSEG has a number of investment
initiatives aimed at meeting NJ State energy policy goals (solar)
and system hardening at both the transmission and distribution
levels that are consistent with the State's goals of enhancing
system performance. With a solar settlement recently reached and
the transmission investments highly probable under FERC
jurisdiction, we see much of this capex program likely to get done
(we use 2/3 of the proposed distribution capex)."
Power earnings visibility: "Power's business model has been
rooted in a hedging program underpinned by the 3 year rolling
energy auction program (
) in New Jersey that effectively layers in a long span of power
prices into each year's hedge position, meaning realized prices are
generally slower to increase or decrease. Balancing the hedging
program with firmer capacity values and a diverse generation fleet
(the CCGTs help in a low gas world), we see Power reaching a
reasonably stable earnings base where utility growth can drive the
story in the out years."
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