The Federal Reserve wrapped up its latest Open Market Committee meeting recently and, as expected, raised the federal funds rate by 25 basis points to 4.75%-5.00%. With the rate-hiking cycle winding down, Consolidated Edison (ED) merits a look, writes John Eade, President at Argus Research.
This was a tricky meeting for the central bank, as inflation remains elevated (perhaps arguing for a larger rate increase) while the financial system has shown signs of cracking (perhaps arguing for a rate cut in order to ease pressure on regional banks).
This was the ninth increase since the central bank lowered the fed funds rate to the rock-bottom level of 0.00%-0.25% early in the pandemic. All 12 governors were in agreement about the hike, as inflation remains elevated. The latest core CPI reading was 5.5% and the latest core PCE Price Index reading was 4.7%.
In a press release announcing the hike, the Fed softened its language, shifting from “ongoing” rate hikes to an “appropriate” stance. Looking ahead, we think the central bank is on track for one more 25-basis-point rate hike in 1H23 before moving to the sidelines, likely for the balance of the year.
Why? The U.S. economy has been walking a fine line between expansion and contraction for the past four quarters. Substantially higher interest rates could tip GDP into recession this year and send the unemployment rate up toward 5.0%. We think the central bank may well be lowering rates if the jobless rate rises above the 4.0% level.
As for ED, we recently raised our rating on the shares to BUY from HOLD. The company is focused on electricity, gas, and steam delivery, and operates in a congested region in and around New York City.
The service area has limited potential for organic growth and, until recently, regulators had restricted increases in customer rates and ROE. However, beginning in 2023, Con Ed will benefit from higher rates, higher ROE, and tax credits.
The company is also buying back stock after previously diluting EPS through new equity issuance. Management also expects earnings to benefit as fuel and purchased energy costs ease and interest expense declines; it currently projects compound annual EPS growth of 5%-7% over the next three years.
The current yield is 3.5%. Our target price is $104.
Recommended Action: Buy ED.
