On Feb 7, we upgraded
DTE Energy Company
) ahead of its fourth quarter earnings release to Outperform. Our
bullish stance is based on its stable and growing utilities and
its complementary non-utility businesses. Going forward, the
growth momentum will be maintained by beneficial regulatory
policies in Michigan, higher authorized rates for its regulated
business, growth opportunities in its un-regulated businesses and
an industry-high dividend yield.
Why the Upgrade?
DTE Energy's regulated electric and gas utilities in Michigan
generate a relatively stable and growing earnings stream. Also, a
constructive regulatory environment in Michigan will aid in
earnings growth. The Michigan Public Service Commission (MPSC)
allows the company's rate case request to be based on a forward
test year in contrast to a historical test year as in other parts
of the country. The MPSC has provided for an uncollectible
expense tracking mechanism that helps in mitigating the impacts
of unfavorable economic trends and a revenue decoupling mechanism
that addresses changes in average customer usage. These
techniques would lead to lower earnings volatility in the future.
DTE Energy is focused on improving its cost structure and
directing capital investments toward renewable generation,
utility infrastructure and environmental compliance assets. A
focus on cost structure and operational improvements will help
the utility attain a 5% - 6% long-term EPS growth target and
shareholder return in the range of 9% to 10%. Improvement in the
cost structure will also come in good stead as it will reduce the
hike in customer bills.
DTE Energy has invested significantly in its non-utility
businesses that diversify risk. Also, it has more growth
opportunities in the Gas Storage and Pipelines and Power and
Industrial Projects segments.
DTE Energy is looking for opportunities to monetize properties in
2013 as well as to optimize the productivity of the wells. It has
rights to monetize shallow reserves above the Barnett Shale,
specifically the Marble Falls formation. These drilling efforts
have led to a large discovery of oil and high Btu gas that will
add value to the asset base.
Other Stocks to Consider
DTE Energy currently has a Zacks Rank #2 (Buy). Other stocks
to consider in the electric utility industry are
Pike Electric Corporation
) with a Zacks Rank #1 (Strong Buy), and
The AES Corporation
) that carry a Zacks Rank #2 (Buy).
AMEREN CORP (AEE): Free Stock Analysis Report
AES CORP (AES): Free Stock Analysis Report
DTE ENERGY CO (DTE): Free Stock Analysis
PIKE ELECTRIC (PIKE): Free Stock Analysis
To read this article on Zacks.com click here.