In a new research report, Deutsche Bank notes that the PJM Interconnection, which is a regional electricity transmission organization in the United States that serves 14 states and the District of Columbia, completed its long-anticipated capacity performance auctions earlier this month. The auctions were in-line with consensus, while the 2018 and 2019 auction provided upside for those on PJM’s eastern and western borders.
With the final data in-hand, the analysts were able to reset their models, and four stocks came out as the big winners. Three of those stocks are rated Buy at Deutsche Bank and we highlight them here.
American Electric Power
American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. The company ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the country. American Electric also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.
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The Deutsche Bank team notes that the stock trades at a discount to its utility peers and they feel it deserves a premium. They also think the company will sell generating assets and buy back shares with the proceeds, which will be accretive.
American Electric Power shareholders are paid a solid 3.87% dividend. The Deutsche Bank price target goes to $63 from $62. The Thomson/First Call consensus target is $60.82. Shares closed on Tuesday at $54.72.
Exelon
This top utility stock also makes good sense now for conservative accounts. Exelon Corp. (NYSE: EXC) is the nation’s leading competitive energy provider, with 2014 revenues of approximately $27.4 billion. Headquartered in Chicago, Exelon does business in 48 states, the District of Columbia and Canada. Exelon is one of the largest competitive U.S. power generators, with approximately 32,500 megawatts of owned capacity comprising one of the nation’s cleanest and lowest-cost power generation fleets.
The company’s Constellation business unit provides energy products and services to more than 2.5 million residential, public sector and business customers, including more than two-thirds of the Fortune 100. Exelon’s utilities deliver electricity and natural gas to more than 7.8 million customers in central Maryland, northern Illinois and southeastern Pennsylvania.
After a long and tedious process, Exelon’s purchase of Pepco looked ready to complete until regulators in the Washington, D.C., area blocked the deal recently, despite the fact area residents and businesses are behind it. The Deutsche Bank team readjusted numbers to consider the deal closing and not closing, and they still are very positive on the stock.
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Exelon investors are paid a very solid 4.36% dividend. Credit Suisse puts a $42 price target on the stock, up from $41. The consensus target is lower at $36.17. Shares closed Tuesday at $28.46.
Public Service Enterprise
Public Service Enterprise Group Inc. (NYSE: PEG) operates nuclear, coal, gas, oil-fired and renewable generation facilities with a generation capacity of approximately 13,146 megawatts. It sells electricity, natural gas, emissions credits and a series of energy-related products that are used to optimize the operation of the energy grid. The company also transmits electricity, and it distributes electricity and gas to residential, commercial and industrial customers, as well as invests in solar generation projects and implements energy efficiency and demand response programs.
The analysts raised the firm’s sum-of-the-parts-based price target to reflect the combined impact of a higher underlying utility earnings per share projection (due to the inclusion of earnings from the company’s gas system modernization plan) and a higher multiple on capacity performance related revenue increases at the generation business.
Public Service investors receive a 3.93% dividend. The Deutsche Bank price target is nudged up to $46 from $45. The consensus target is $42.38. Shares closed Tuesday at $39.67.
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When the market gets spooky and volatile like it has been, shifting some of a portfolio to a utility allocation makes sense, even if it is just to ride out the storm. Eventually the selling should wear itself out, and these stocks can help to cushion the market hit.
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