Pattern Energy's Headwinds Could Blow Over, Goldman Sachs Upgrades

Pattern Energy Group Inc PEGI, a power company that focuses on wind, solar and transmission projects in the U.S., has underperformed recently, offering investors an entry point, according to Goldman Sachs.

The Analyst

Goldman Sachs analyst Brian Lee upgraded shares from Neutral to Buy, with a 12-month price target of $25, suggesting a 22 percent return potential compared to the 11 percent average return of the firm's coverage universe.

The Thesis

A combination of lower wind production, equity issuance and U.S. tax reform concerns have pressured the shares of Pattern Energy in recent months, Lee said in a note. Given the view these headwinds are transitory in nature, the analyst sees a setup for easier comps and mean revision potential, with respect to weather-impacted production levels.

This, according to Lee, argues for a favorable risk/reward.

Pattern Energy is now one of the highest-yielding YieldCos at about 8 percent on 2018 estimates compared to 6.5 percent for peers, Goldman said. The firm believes execution on dropdowns and organic cost improvements would support 20 percent cash available for distribution, or CAFD, in 2018-19, and an improvement in payout ratio back down to 85-90 percent.

Goldman sees the returning of fourth quarter wind production to average, dropdowns and lower payout ratio, organic cost savings and liquidity as upcoming catalysts.

The Price Action

Shares of Pattern Energy are up over 14 percent over the year-to-date period, although they have shed about 15 percent since late-September.

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