Public Service Enterprise To Finally Gets Its Props, Morgan Stanley Upgrades

As such, the firm upgraded shares of the company to Overweight but maintains its price target unchanged at $53, which implies a 17-percent upside from current levels.

At the time of writing, shares of Public Service Enterprise were rallying 2.28 percent to $46.26.

Analysts Devin McDermott and Stephen Byrd said Public Service Enterprise is a clean, well-run company, with a high growth utility and quality merchant power business. The analysts said the company has best-in-class 9 percent utility growth, supported by merchant free cash flow and robust infrastructure investment plan.

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Meanwhile, the analysts noted that the power business traded at about 25 percent free cash flow to equity yield despite a high-quality asset base and limited debt.

The analysts also noted that there are many upside drivers, with several constructive regulatory initiatives pending. Among the catalysts over the next year are:

• Constructive regulatory changes.
• Rate case clarity.
• New utility capex approvals.
• Zero Emission Credits and/or carbon pricing in New Jersey.
• Power price regime.
• Tax reform.

"Our revised EPS estimates are now in-line with consensus, versus below previously, before accounting for these potential upsides," Morgan Stanley said.

"In our bull case, we assume power price reform drives $2/MWh of around-the-clock price uplift, equating to $0.14 of incremental EPS."

On valuation, Morgan Stanley said the current level is attractive, with a risk-reward profile skewed heavily to the upside. The firm is of the view the current stock price reflects very limited value for power despite its strong investment grade credit metrics, which is at an unchanged 25-percent free cash flow yield.

Additionally, the firm sees several catalysts over the next year across both business segments that could further de-risk the story and/or increase earnings. With these potential upsides not factored in the firm's and the consensus estimates, it believes success on any would be additive to an already attractive story and valuation.