3 Reasons Goldman Sachs Takes Sempra Energy Off Of Conviction Buy List

Goldman Sachs has downgraded Sempra Energy

to Neutral from Buy, and removed the shares from America's Conviction List on consensus EPS risk, limited near-term catalysts, and valuation. ‘Near-term EPS risk remains a headwind and we see downside relative to consensus for 2016/2017 EPS estimates," analyst Michael Lapides wrote in a note. Sempra Energy sees 12 percent EPS growth through 2020 and plans to use free cash flow in 2019/2020 to buyback shares worth $2 billion. "Share buybacks, while positive, help partially – but not fully – offset a slowing growth profile given fewer reinvestment opportunities," Lapides highlighted. In addition, recent asset sales, lower regulated or contracted earnings in the US, Mexico and South America is also expected to weigh on earnings. "We still assume almost $1bn+ of potential project "wins" in Mexico in the coming years, but slightly moderated versus prior views given increased competition for new awards there," Lapides said. As such, the analyst cut his 2016 EPS view to $4.72 from $5.05, with consensus at $4.88. The analyst also trimmed his 2017 EPS estimate to $5.28 from $5.61, with consensus at $5.38. Meanwhile, the company's analyst day coming in July may offer few new catalysts as the capital allocation plans already disclosed. The key topic at the event will be potential new LNG project announcements which "we view as unlikely at this point given oversupply of LNG capacity globally." Valuation now appears less compelling and the analyst cut price target to $108 from $110, with the new target implying only 4 percent total return potential. Shares of Sempra Energy closed Friday's regular trading session at $109.46.