UBS Drops Entergy To Sell On Risks, Says Street Is Overly Optimistic

• Entergy Corporation ETR shares are down 30 percent year-to-date, and are trading at the lower end of their 52-week range of $61.27 - $92.02.
• UBS analyst Julien Dumoulin-Smith downgraded the rating on the company from Neutral to Sell, while reducing the price target from $73 to $59.
• Dumoulin-Smith cited risky sales targets and uncertain future of the company’s nuclear business as areas of concern.

Analyst Julien Dumoulin-Smith believes that the future of Entergy’s nuclear business remains bleak and expects its size to shrink by yearend. “After the latest disclosures of potential early retirements of Fitzpatrick (838MW) and Pilgrim (688MW) we are increasingly concerned about the unregulated plant value.”

Dumoulin-Smith expects the phasing-out of Entergy’s merchant nuclear efforts to continue, since only one of the company’s plants and two units at Indian Point are generating meaningful free cash flows.

In view of the various ongoing petitions to close the company’s Indian Point plant, the analyst believes that the plant’s remaining life is finite, about 18-20 years in a best case scenario, assuming successful relicensing.

Cash flows from this plant are expected to get squeezed by declining energy and capacity prices amidst an inflationary cost structure. The UBS report adding, “Following previous quarters cautioning on execution on sales growth targets, we see downside in our regulated estimates, which remain at the high end of the guided 2015 and 2016 Net Income utility ranges.”

Entergy’s shares could remain under pressure into “3Q and EEI updates, as both utility expectations and nuclear EPS could moderate on higher costs,” Dumoulin-Smith mentioned.