A Thought...
SECTOR REVIEW
Regulated Utilities = Investment Opportunity?
Regulated utilities were the stars of 2008, outperforming the S&P 500 by
18% as the market sought defense in a recessionary environment. 2009
started off as a 'push' with the group lagging by 5% since February.
We think recent weakness points to an interesting opportunity since:
■
Utilities trade at 9.4x 2009 and 8.4x 2010 P/E versus long-term averages
using current and 1-year forward estimates of 12.6x / 11.8x, leaving the
stocks in the bottom quartile of valuations since 1990. Reversion to longterm
average valuations would support 34% upside in the stocks.
■
On an asset value basis we are also adding EV / rate base to our
arsenal, allowing us to consider the price paid for the entire company
relative to its productive capital base that regulators actually allow them to
earn against; remarkably most utilities are trading near or below rate
base which effectively provides the opportunity to buy assets at cost.
■
Utility dividend yields are approaching 20 year highs on an absolute
basis and relative to both corporate and Treasury bond yields where
dividend yields are now offering a premium return.
■
Utility valuations relative to the S&P 500 are reasonable to attractive
(depending on the disparate S&P earnings numbers used); using Credit
Suisse's S&P estimate Utilities now trade at 82% vs 82% historically.
■
We also look at price to book value (both stated and tangible) which also
point to attractive valuations although we would downplay this approach.
Where we see pushback against Regulated Utilities (see page 8):
■
Sector rotation. This recession utilities have been safe; when is the turn?
■
Regulatory risk. Do utilities lose out to customer bills?
■
Dividend cuts. We have had two so far but don’t think it is a trend.
■
Estimate cuts. Weak demand hurts (our standing view) but could be worse.
We believe buying attractively valued Regulated Utilities could offer
attractive returns potential based on rich (and relatively secure) dividend
yields and room for multiple expansion off current multi-decade lows.
Excluding thematic leverage to carbon and renewables policy, our bias is
toward Regulateds over Integrateds in coming months until (a) lower
commodity prices roll through Integrated estimates and (b) more positive
economic data comes out. We are upgrading DUK and ED to Outperform.

And, while we have generally been less enthusiastic about the Regulateds, we think the
general market weakness compounded by the recent dip in stock prices has created an
interesting investment opportunity that deserves additional investor attention particularly
as we see attractive valuations against virtually all metrics both versus history and the
market.
The Value Proposition
We always struggle to make investment decisions rooted in past stock / valuation
performance if only because we appreciate that every market is different and the factors
impacting shaping stock performance are likewise different. That said, occasionally we
see valuation dislocations that to us warrant a deeper look at history with today’s
valuations being one of those points in time.
Looking at Regulated Utilities relative to history across a series of screens we generally
see valuations as more compelling today than at most other points since 1990 – a period
that now includes 3 recessions and quite a bit of structural change in the business
(including the need to absorb significant environmental policy reform with the Clean Air Act
in the 1990s).

[此贴子已经被作者于2009-3-17 16:36:08编辑过]