We have downgraded our recommendation on
) to Neutral from Outperform on Jan 28, 2014. The company
currently has a Zacks Rank #3 (Hold).
Why the Downgrade?
The downgrade was based on the negative verdict from the
Mississippi Public Service Commission (MPSC) related to the
proposed spin-off of Entergy Mississippi's electric transmission
business and its subsequent merger with a subsidiary of
ITC Holdings Corp.
). MPSC rejected the transaction on the ground that it is not
going to be a lucrative move for Mississippi customers. The
approval of the deal would lead to an increase in the electricity
rate for Mississippi customers by $300 million over 30 years.
Going back, in Dec 2011, Entergy had entered into a definitive
agreement with ITC Holdings to sell its electric transmission
business to the latter for approximately $1.8 billion.
ENTERGY CORP (ETR): Free Stock Analysis
ITC HOLDINGS CP (ITC): Free Stock Analysis
NATL GRID -ADR (NGG): Free Stock Analysis
NRG YIELD INC-A (NYLD): Free Stock Analysis
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Per the agreement, Entergy would have divested its electric
transmission business to a newly formed entity known as Mid South
TransCo LLC ("Transco"). Post merger, Entergy was supposed to
have an approximately 50.1% stake in ITC Holdings in exchange for
their shares in TransCo. The existing shareholders of ITC
Holdings would have held the remaining 49.9% stake of the
Entergy intended to utilize a major part of the cash proceeds
from the transaction to redeem debt. Apart from boosting its
earnings, the transaction would have allowed the company to focus
more on its power generation and distribution businesses.
Despite the negative sentiment from the proposed merger denial,
we believe Entergy is well positioned on the strength of its
geographically-diversified mix of regulated and merchant
operations. This insulates the company from regulatory
bottlenecks and power-price volatility in any particular region,
helping the company to achieve its targeted annual compound
earnings growth of 6% in the next five years.
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