UTILITIES LUKE FRIEDMAN & GENO FRISSORA

Transcription

1 UTILITIES LUKE FRIEDMAN & GENO FRISSORA

2 RECAP RECOMMENDED ADDING 23 BP TO UTILITIES Utilities 3.34% SIM Weighting Utilities 3.57% S&P Weighting Industrials 9.78% Materials 3.40% Telecom 3.53% Technology 21.22% Industrials 10.95% Materials 3.73% Telecom 2.73% Technology 19.60% Consumer Discretionary 7.46% Financials 12.27% Consumer Discretionary 10.83% Financials 14.11% Consumer Staples 11.98% Health Care 13.19% Energy 11.13% Consumer Staples 10.87% Health Care 11.69% Energy 11.92% Technology Energy Consumer Staples Industrials Materials Financials Health Care Consumer Discretionary Utilities Telecom Technology Energy Consumer Staples Industrials Materials Financials Health Care Consumer Discretionary Utilities Telecom

3 POSITIONS Current Positions XEL Xcel Energy Inc. (SELL) PPL PP&L Corporation (SELL) Recommendations NRG NRG Energy Inc. (BUY) BIP Brookfield Infrastructure Partners (BUY)

4 XCEL ENERGY INC.(XEL) Overview Energy Transmission and Generation via Electricity (82% of Rev) and Natural Gas (17% of Rev) Operates in 8 different states across the U.S. Ex. Minnesota, Colorado and New Mexico Operating Revenue last year of $10.3 B Net Income last year of $756 M Dividend of 4% Supply Factors Potential Legislation Ex. Cross State Air Pollution Rule (CSAPR) Commodity Prices difficult to predict Demand Factors General Population Programs to reduce domestic demand Gross Margins Excellent at 50% Performance to date has been good

5 XEL VS. S&P 500 Fairly Consistent prior to August Room for correction XEL Flat-lining

6 XEL DISCOUNTED CASH FLOW ANALYSIS Assumptions 4% Revenue Growth 5% Earnings Growth Very high earmarked capital expenditures Decreases Cash Flow Good Gross Margins Terminal Discount value of 9% Terminal FCF Growth rate of 3.5% Implied Equity Value of %

7 XEL RELATIVE VALUATION Relatively expensive compared to the Industry Trading at a Premium Relatively expensive compared to the S&P 500 Trading at a Premium

8 XEL ABSOLUTE VALUATION OVERPRICED! Valuation Type Weight Valuation Weighted Value P/Forward E 12.5% P/S 12.5% P/B 12.5% P/EBITDA 12.5% P/CF 12.5% Analyst Median 12.5% Analyst Mean 12.5% DCF 12.5%

9 PPL OVERVIEW Overview Provides diversified power generation and transmission Operates in the Northeastern US, Montana, and the UK Operating Revenue last year of $3.026 B Net Income last year of $1.594 B Dividend of 5% Fundamental Positives Pennsylvania State Rate Cap removed Low input costs due to generation operations Good growth opportunities from recent acquisitions Fundamental Negatives Extremely high capex over the coming years 26% of expected revenue in next two years High degree of share dilution 53% new shares issues since 2009 Goodwill of $5.179 B on balance sheet Representing 12% of assets

10 PPL VS. S&P 500 Outperformed the S&P Expected mean reversion Likely range bound

11 PPL DISCOUNTED CASH FLOW ANALYSIS Assumptions Optimistic Revenue Forecast with growth falling from 13% - 4% Earnings Growth around 5% Capex falling from 26.5% to 14% Negative Free Cash Flow Operating margins at 20% Terminal Discount value of 9.5% Terminal FCF Growth rate of 3% Implied Equity Value of $ % upside

12 PPL RELATIVE VALUATION Relative to High Low Median Current Industry P/Trailing E P/Forward E P/B P/S P/CF Valuations all on low end Looks undervalued Could be due to fundamental concerns Share dilution not shown by these metrics Relative to S&P High Low Median Current 500 P/Trailing E P/Forward E P/B P/S P/CF More toward median levels with S&P Still looks undervalued Share dilution not shown by these metrics

13 PPL ABSOLUTE VALUATION Absolute Valuation High Low Median Current #Your Target Multiple *Your Target E, S, B, etc/sha re Your Target Price (F x G) A. B. C. D. E. F. G. H. P/Forward E $2.33 $28.66 P/S $21.89 $30.65 P/B $18.97 $32.25 P/EBITDA $7.67 $38.35 P/CF $4.82 $31.33 Fairly Valued P/B distorted because of high amount of Goodwill P/EBITDA does not include interest expense Current Price = $28.40 Discounted Cash Flows = $30.59 Implied Upside = 7.7%

14 NRG OVERVIEW Overview Diverse Power Generation Portfolios including Natural Gas Operating Revenue last year of $8.85 B Net Income last year of $476 M Recently announced a 2% dividend for first time Supply Factors Commodities, specifically Natural Gas Gross Margins 32 % UNDERVALUED!

15 NRG Fairly high negative correlation with the capacity of Electric and Natural Gas Utilities

16 NRG Fairly high negative correlation with the production of Oil and Natural Gas

17 NRG Fairly high correlation with the price the firm charges for Natural Gas

18 NRG VS. S&P 500 Looks to be undervalued compared to the S&P 500

19 NRG DISCOUNTED CASH FLOW ANALYSIS Assumptions 0% Revenue Growth after 2012 (Extremely conservative) Decent Gross Margins Price of Natural Gas Terminal Discount value of 9% Terminal FCF Growth rate of 3.5% Implied Equity Value of 67.2%

20 BIP OVERVIEW Overview Operates in Utilities, Transports & Energy, and Timber Transports include: Pipelines, Rail & Port construction etc. Exposure to Global Infrastructure Operating Revenue last year of $803 M Net Income last year of $187 M Dividend of 5.1% Planned distribution growth of 3-7% Income 80% of cash flow regulated or contractual Transmits electricity to 98% of Chile Current $600 M Australian Railroad project 419,000 acres of Timberland Exports to Asia increased 47% in 2011 Growth $5 B of potential organic growth projects under consideration Gross Margins Excellent at 48.1%

21 BIP VS. S&P Outperformed the S&P Reasonably new company with great earnings potential Lots of room to grow

22 BIP DISCOUNTED CASH FLOW ANALYSIS Assumptions 15% Revenue Growth 2027% in % in % Operating margin 20% Tax Rate Capex falling from 10% to 7% Dep. Rising fom 3.2% to 7% Terminal Disc. Rate at 11% Terminal FCF Growth 4% Implied Equity value $ % upside

23 RECOMMENDATIONS NRG ADD 232 BP Undervalued Natural Gas correlation is very high (inexpensive) BIP ADD 125 BP High Growth Revenues Undervalued due to expected growth Highly diversified

24 WHAT QUESTIONS DO YOU HAVE?