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National Grid Is One Utility Worth Buying Despite Rate Hike Expectations

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National Grid Is One Utility Worth Buying Despite Rate Hike Expectations
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Argus has upgraded National Grid plc (ADR) (NYSE: NGG) to Buy from Hold, citing the company’s underlying business fundamentals as remaining strong, with 90 percent regulated operations provides a “high level” of earnings visibility.

Positive Expectations

The upgrade comes despite expectations of a rate hike, as rising interest rates would increase the interest costs of utilities, which are heavily debt-financed.

But, the brokerage said the U.K.-based electric utility is benefiting from investments in its U.K. network and from a favorable regulatory backdrop, which may aid returns well above its cost of capital.

“In the U.S., National Grid’s business is poised to recover, driven by rate increases, cost-savings programs, and new capital projects,” analyst John Eade wrote in a note.

Risks

However, Eade noted that continued weakness in GBP is a risk as earnings and dividend estimates in U.S. dollars are coming down as the pound deteriorates.

Valuation

On the valuation front, National Grid trades at 13.7-times Argus’ FY 2017 EPS estimate, toward the low end of the five-year historical average range of 11.7–17.0 and below the peer average of 16.5 for current-year P/E.

The analyst has set a price target of $62 on the shares, which have underperformed over the past quarter, falling 16.7 percent. On the other hand, S&P 500 rose 1.8 percent in the same period.

“Using a dividend discount model, we arrive at a fair value for NGG in the mid-$60s per ADR, about 15 percent above current levels,” Eade added.

At last check, ADRs of National Grid were down 0.12 percent to $56.99.

Image Credit: By Rept0n1x (Own work) [GFDL or CC BY-SA 3.0], via Wikimedia Commons

Latest Ratings for NGG

DateFirmActionFromTo
Dec 2016Argus ResearchUpgradesHoldBuy
Sep 2016BernsteinDowngradesOutperformMarket Perform
Jul 2016RBC CapitalDowngradesOutperformSector Perform

View More Analyst Ratings for NGG
View the Latest Analyst Ratings

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