Jefferies Offers A Pair Trade In Electric Utilities: PNM Upgraded, American Electric Downgraded

Analysts Anthony Crowdell and Benjamin Budish believe PNM merits upgrading from Hold to a Buy rating on the expectation that a state regulator's rate decision would be more balanced than what it was predicted to be. On the other hand, they have downgraded American Electric shares from Buy to a Hold rating to reflect lowering of EPS estimates for 2017–2019.

Similarly, while the price target for PNM increased from $35 to $37.50, target price for American Electric was slashed from $77 to $67.

Further Justification

Referring to PNM Resources, the brokerage said in a research note, "A very negative Hearing Examiner recommendation was issued back in August and we believe a final order will avoid this contentious recommendation. With 7–9 percent EPS growth trading at a 7 percent discount it may be time to come aboard. Back in August the Hearing Examiner issued a very negative recommendation that we view as unlikely to impact the final order."

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As far as American Electric is concerned, Jefferies lowered its EPS estimates for 2017–2019 from $3.80, $4.05, and $4.25 to $3.65, $3.90 and $4.20, respectively. The brokerage pointed out that its EPS projections for 2017 is based on the expectations of Transco's base case earnings.

"We do not think the Street is factoring in the loss of genco earnings in 2017–2019. Our price target assumes a group average multiple, and we currently finding the stock trading at a 2 percent discount," the brokerage said.

At time of writing, American Electric was seen trading at $65.30, down 0.18 percent on Tuesday. PNM was up 1.97 percent at $33.66.

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