Scalper1 News
Summary We initiate coverage on El Paso Electric with a Neutral rating and TP of $40. The TP is based upon company’s future financial performance and historical valuation against industry peers. Current political situation in El Paso may cause challenges in reaching a settlement with the PUCT. Thus, the company would have to face uncertainty related to litigation. PVR anticipates the regulators of Texas and New Mexico to finally allow the significant increase in rate base. However, the current stock price is not including uncertainty related to regulatory. EE would have to apply for relief in rates in challenging jurisdictions as a result of new generation investment. Plain Vanilla Research ((NYSE: PVR )) initiates coverage on El Paso Electric Co. (NYSE: EE ) with a Neutral rating and a target price ((TP)) of $40. Since September, the stock price of El Paso Electric has outperformed the Utilities Sector by 7.28 percentage points (ppts). This is shown in the chart below: (click to enlarge) However, we think that the performance is not sustainable in the future as the company is facing challenges on multiple fronts. This restricts the stock from offering significant upside potential. In addition to that, a dividend yield of only 3% is not very attractive to tempt dividend investors. We will be discussing the challenges below: 1. Political Circumstances In El Paso In the past, proceedings related to change in rate base in El Paso have been engulfed with politics a lot. The company can be anticipated to face an interesting stance from the City Council officials as they will try to create challenges for the company to reach a settlement agreement. Furthermore, the supporters of solar-powered energy have also entered the arena as the publicly-listed corporation is trying to create alterations in rate design, which would cause installers of rooftop solar panels to make a partial requirements fee payment. Instead of reaching a settlement with the City Council authorities, we think the company should play the long game and wait for a decision from the Public Utilities Commission of Texas (PUCT). Although, the road is long and would result in higher uncertainty but it will result in a more favorable decision for the organization. 2. Approval From Texas And New Mexico Regulatory Authorities We anticipate that the regulatory authorities of Texas and New Mexico will allow the significant increase in rate base at the end. However, the current stock price reflects that investors expect the regulatory authorities to allow the increase in rate in any case. We think that slight hindrance in regulatory approval will result in the stock price on a downward trajectory. Texas is responsible for contributing roughly three-fourth to El Paso Electric’s bottom line. Meanwhile, the remaining contribution is from the state of New Mexico. 3. Demand For Rate Relief Requests In Challenging Jurisdictions El Paso has the finished the construction of two peaking units located at the Montana Power Station (MPS). In addition to that, the company will be finished with the construction of the third unit by spring of next year and by year-end, the company intends to complete the construction of the fourth unit. The four units are natural-gas powered and will have a capacity of 352 megawatts ((NYSE: MW )). These units are built to cater the increasing requirement of electricity in El Paso’s service territory. Montana plant and support infrastructure is anticipated to have a cost of $375 million. The company has been lucky to experience an annual growth rate of 1% to 1.5% for the past several years in the service territory. Normally, the industry has been seeing flat or decline in power consumption. Derivation Of Price Objective PVR has based its target price (TP) of $31 at earnings per share ((NYSEARCA: EPS )) of $2.67 along with a forward P/E multiple of 15.39x. The following forecasted income statement reflects as how we have arrived at our 2018 EPS. Currently, El Paso Electric’s stock is exchanging hand at PVR’s forward price-to-earnings (P/E) multiple of 15.44x. In the past three-years, the stock has traded at an average forward P/E multiple of 14.94x. This reflects that the stock is trading at a premium of 6.5% against its three-year average forward P/E multiple of 14.94x. (click to enlarge) Meanwhile, against its peers’ combined forward P/E multiple of 12.23x, El Paso Electric’s stock is presently trading at a premium of 26.2%. In the past three years, the stock has traded at an average premium of 22% against its peers’ combined forward P/E. (click to enlarge) We have arrived at our target forward P/E multiple for El Paso Electric by calculating the three-year average forward P/E multiple of 12.24x for the combined industry peers. After that, we have applied the three-year historical premium of 22% to the historical average peers’ combined forward P/E multiple to reach El Paso Electric’s target forward P/E multiple of 14.93x. We have formulated the peers forward P/E multiple by combining our forward P/E ratios of Consolidated Edison (NYSE: ED ), PG&E Corporation (NYSE: PCG ), PNM Resources Inc (NYSE: PNM ), American Electric Power Company Inc (NYSE: AEP ) and Xcel Energy Inc (NYSE: XEL ) along with El Paso Electric. We have given their respective P/E weight according to their market capitalization. Scalper1 News
Scalper1 News