Goldman Sachs’ Michael Lapides expressed concern regarding utilities over the next 12 months, given that the 10-year U.S. Treasury is expected to persist below 3 percent through 2017.
Lapides maintained a Buy rating on Entergy Corporation ETR, while raising the price target from $87 to $88 and adding the company to Goldman Sachs’ Americas Conviction List.
Why Conviction List
The analyst explained that Entergy was added to the Conviction List due its attractive valuation and dividend yield, which was above peer, as well as the low expectations heading into the analyst day scheduled for June 9.
“We note the current share price implies either (1) a discount on ETR’s regulated segments or (2) limited or no value for ETR’s non-regulated, nuclear plants in NY and MI,” Lapides mentioned.
This valuation is unsustainable, given that Entergy’s merchant nuclear plants generate free cash flow of $1-$2 per share.
Estimates Above Consensus
The 2016-2018 estimates are currently above the consensus forecasts, driven by expectations of robust cost management and improvements in regulatory processes that would help Entergy’s core regulated segments to generate improving earned returns on rate base.
The EPS estimates for 2016, 2017 and 2018 have been raised to reflect the revised financing and cost management assumptions.
“We expect ETR to highlight (1) rate base growth potential from new gas plants, gas reserves, automated metering and transmission, (2) cost management and (3) multi-year EPS/EBITDA growth,” Lapides added.
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