Calpine Corp. (NYSE: CPN) has been part of a weakening utilities industry that is now starting to recover in 2016. This industry underperformed the S&P 500 in 2015 with a loss of 8.4%, but it is outperforming in the first weeks of 2016 with a gain of 5.7%. Despite this move higher after the new year, one key independent research firm is backing off one of these companies in the near term.
Argus is lowering its near-term rating on Calpine to a Hold rating from Buy. This downgrade reflects lower power prices, driven by weak demand and excess generation capacity. The firm expects power prices to remain weak in the coming quarters and does not see a near-term catalyst for the shares.
Over the long term, however, Calpine appears well positioned to benefit from its primarily natural gas-fired plants and from its ability to provide flexible and efficient power generation. It should also be able to take market share from coal-fired plants, which are facing increasingly strict environmental regulations. As a result, Argus has a long-term rating that remains Buy.
Earlier in February, Calpine reported fourth-quarter earnings of $0.19 per diluted share, up from a loss of $0.13 per share in the prior-year quarter. At this time, EPS exceeded the consensus loss estimate of $0.16 per share and the Argus EPS estimate of $0.06.
The firm maintained its 2016 EPS estimate of $0.75, down from $1.08 in 2015, reflecting expectations for lower power prices. Argus is setting a 2017 estimate of $1.06. The consensus EPS estimates are $0.63 for 2016 and $1.02 for 2017.
Shares of Calpine were trading down 4.2% at $13.60 on Tuesday, with a consensus analyst price target of $20.07 and a 52-week trading range of $11.53 to $23.51.
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