Markets

Analyst Actions: DTE Energy Upgraded to Outperform, TP Lifted $3 at Credit Suisse

UPGRADING to OUTPERFORM (from Neutral); MI a Premium State; Raising Estimates and Target Price to $59 (from $56). The stock is up 1.5% at around $52.23, leaving it shy of a year high 53.00.

Our take: We met with Gerry Anderson, CEO, Dave Meador, CFO and separately with the MPSC, CMS, and ITC. We ended our trip believing that Michigan is a premium state offering constructive regulation that properly supports reinvestment into local economies that should translate into 5-6% EPS growth, plus a slightly better than group 4.6% dividend yield. We are upgrading our rating on DTE to Outperform from Neutral.

Visible 5-6% EPS Utility Growth. DTE issued a viable capital plan to meet reliability, environmental, pipeline safety, and state policy goals that will limit fully loaded customer rate increases to ~3% and result in 5-6% EPS growth. Also what is unique to DTE is the annual $300 MM Fermi Nuclear Station securitization expense will roll-off in late 2014 and result in direct savings to customers that in our eyes should alleviate some regulatory angst in approving capital projects given the additional rate headroom. DTE's stated equity needs are ~$300 MM annually met through its drip and dribble plans.

Non-utility earnings are not so unregulated. It appears that ex. trading and REF operations, the non-reg earnings are for the most part locked-in through mid to late decade with (a) visibility into its pipes capital plan with earnings power nearly doubling by 2016 (b) planned monetization of its E&P operations sometime in 2012 (c) P&I earnings becoming more stable with coke operations mostly contracted through 2014-15 and better transparency in REF's range of potential earnings power through 2019-2021. We believe the biggest uncertainty to earnings is the trading business which accounts for ~6% of DTE's earnings.

We are upgrading DTE to Outperform from Neutral with a $59 (Old $56) target price. While the stock looks in line on 2013 P/E of 13.1x vs peers DTE's better than group EPS growth and dividend yield is better captured using our Rate of Return framework where DTE offer a top quartile annual rate of return of 10.1% We are raising our 2012/2013 EPS estimates to $3.68/$3.99 (from $3.67/$3.92).

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

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

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