Goldman Adds PG&E To 'Conviction Buy' List, Removes Entergy

Citing near-term risks, Goldman Sachs’ Michael Lapides removed Entergy Corporation ETR from the Americas Conviction List. The analyst added that PG&E Corporation PCG seemed to be “a more attractive option for investors seeking yield and dividend growth.”

Entergy

Lapides maintained a Buy rating on the company, while reducing the 12-month price target from $90 to $85. An increase in Entergy’s regulated nuclear operating costs would add further pressure on the 2017 forecasts.

The EPS estimates for 2017 and 2018 have been reduced from $5.22 to $5.12 and from $5.20 to $5.13, respectively, to reflect that higher nuclear operating costs on Entergy’s existing large regulated fleet may offset the impact of cost control at the company’s smaller non-regulated units. These estimates are now 1 percent below the current consensus forecasts, Lapides noted.

“We raise our 2019 estimate by $0.02, to $5.40, given eventual expected cost recovery but recognize regulatory lag presents a modest near-term risk,” the analyst wrote.

Entergy’s shares currently trade at a discount to its large-cap regulated utility peers, despite 90-95 percent of the company’s earnings in 2017-2019 being contributed by its regulated businesses. Thus, the relative valuation of Entergy’s stock “remains compelling,” Lapides commented.

PG&E

The analyst added the stock to the Americas Conviction Buy List, reiterated a Buy rating and raised the 12-month price target from $66 to $67. He expects the company to achieve its 60 percent payout ratio target in 2018, a year earlier than guidance, and to generate 8.5-10.5 percent annual dividend growth through 2019, “among the top dividend growth levels within our universe.”

Lapides mentioned that 2017 and 2018 are likely to be “the first relatively normal years of earnings after the 2010 San Bruno pipeline incident and multiple years of related cost inflation and regulatory penalties.” He expects PG&E’s EPS growth to accelerate in 2018.

"In our view, PCG should evolve into a premium story as (1) cash flow accelerates given approved revenue increases and as capital spending growth levels off; and (2) dividend growth improves off of a below-average payout ratio," the analyst wrote.

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