PG&E Removed From Goldman's Conviction List Amid California Wildfire Concerns

The Americas Conviction Buy List consists of Goldman's Buy-rated U.S. and Canadian stocks, including ADRs, which it has shortlisted as possessing the best alpha generation opportunities. Alpha is the incremental returns of a stock/fund over a related benchmark.

At time of writing, shares of PG&E were sliding 8.32 percent at $52.91.

Citing the potential impact of the California wildfires on cashflow and valuation, analyst Michael Lapides noted that the shares of the company lost over $5 billion in market cap value or almost $11 per share. The negative sentiment stemmed from reports that suggested that downed power lines potentially played a role in the wildfires.

Goldman no longer sees PG&E as representing its best idea among large-cap utilities, given its new position as a "value without a catalyst story" or "value with an overhang story in the coming months. With the wildfire incidence, the firm believes there is likely to be a delay in the company's improving cash flow story.

The firm reduced its estimates for the company to reflect sizable, roughly $2 billion, potential cash outflows related to wildfire-related damages. The reduction also reflects the firm's assumption of multiple years of "lag" to recover these costs, taking cash recovery out beyond its forecast period.

Therefore, the firm expects higher financing needs in the near term, which drove it to lower its earnings per share estimates to reflect increased shares outstanding. The firm lowered its earnings per share estimates for the period from 2017 to 2020 to $3.65, $3.76, $3.95 and $4.14, respectively from $3.67, $3.88, $4.09 and $4.28.

"PCG still screens at a sizable discount to peers, remains a value idea among utilities and — despite this new overhang — we maintain our Buy rating," the firm added.

In lieu of PG&E, Goldman added NextEra Energy Inc NEE to its Americas Conviction List as its top large-cap idea. Giving the rationale for the action, the firm said it believes NextEra Energy presented top-tier dividend growth, strong utility regulation in Florida and tailwinds from increased renewable development in the U.S.