Dominion Resources Downgraded At Morgan Stanley, Valuation Cited

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With Dominion Resources, Inc. D shares having appreciated 13 percent year-to-date, Morgan Stanley’s Stephen C. Byrd believes the shares are fully valued at the current level with only 5 percent upside potential.

Byrd downgraded the rating on the company from Overweight to Equal Weight, while lowering the price target from $79 to $82.

Risk-Reward Balanced

“The primary drivers of our price target reduction are an expectation for lower sales growth at D's regulated utility, VEPCO, in light of recent data points, and lower commodity prices impacting profitability at the Millstone nuclear plant,” the analyst explained.

Related Link: Dominion Reports Q2 Adj. EPS $0.71 vs. Est. $0.71, Rev. $2.598B vs. Est. $2.92B

Although Byrd views Dominion Resources as an attractive business in the longer term, the analyst views the risk/reward as balanced at the current levels.

Well Positioned

Byrd pointed out that Dominion Energy and Dominion Midstream Partners LP DM were well positioned to benefit in the longer term from secular demand growth for Appalachian gas production, driven by Dominion Resources’ favorable positioning in the Marcellus/Utica region.

VEPCO

“On the other hand, VEPCO intends to spend growth capex worth $10.2 billion during 2016–2020, driven by “(1) distribution modernization and undergrounding programs, (2) transmission investments focusing on reliability, substation security, and growth, and (3) robust regulated generation needs,” the analyst stated.

The utility also had an attractive rate certainty, given that it is able to avoid the biennial return reviews until 2022. However, through the 2Q earnings season, the utility has witnessed weak sales growth.

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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsMorgan StanleyStephen C. Byrd
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