Entergy Corp: Guidance Risks And Ability To Meet Estimates

Stephen Byrd of Morgan Stanley has downgraded Entergy Corporation ETR to Underweight on potential risks to earnings from higher nuclear costs and continued weakness in sales.

“We see risks to earnings power at the utilities due to potential disallowance of nuclear costs and a continuation of recent weak sales growth trends. Furthermore, our revised EWC estimates imply the business is cash flow negative 2016–20,” Byrd wrote in a note.

Despite Entergy’s third-quarter earnings modestly beating expectations, the analyst noted that the estimated $1.4 billion in incremental nuclear costs for 2017–19 were meaningfully higher than expectations.

“ETR's revised earnings guidance, which was cut for 2017-18 but unchanged for 2019, assumes full recovery of higher nuclear costs by 2019 through customer rates. However, we see risk that shareholders are at least partially responsible for these costs,” Byrd continued.

The analyst projects about $0.28 earnings hit in 2019 relative to guidance assuming shareholders and customers split the incremental costs 50/50.

Furthermore, the analyst is disappointed with weather-adjusted sales growth continued to miss management's 2016 guidance and believes the company’s long-term outlook for about 1.5 percent retail sales is not achievable.

“Our assumption of ~0.9 percent sales growth results in a $0.20 hit to 2019 earnings relative to guidance,” Byrd added.

The analyst also cut his price target by $10 to $68, implying 6 percent downside from Wednesday's $72.28 closing price.

At the time of writing, shares of Entergy were down 0.91 percent to $71.62.