Next week’s economic reports presented by Fawad Razaqzada, Market Analyst, Forex.com....
A Nuke with Glowing Prospects
01/21/2008 12:00 am EST
Roger Conrad, editor of the Utility Forecaster, says Entergy should do well, particularly if it spins off its nuclear-plant operations to shareholders.
Two years ago, Entergy’s (NYSE: ETR) regulated utility business was literally in ruins. The core New Orleans subsidiary, as well as units in Mississippi, Louisiana, and Texas, faced billions in repair costs, and thousands of customers lost their homes [in the wake of Hurricane Katrina].
However, Entergy stayed on its feet for one reason: a portfolio of well-run nuclear power plants—the nation’s second largest—that ran at 90% plus capacity while wholesale electricity prices surged.
With utility operations recovered, third-quarter earnings surged 27.8% and are set for another 20% [rise] next year. Management shared some of that bounty by hiking dividends 38.9% in 2007. This year, shareholders will get more cash, as well as a 50% interest in the company’s five unregulated nuclear plants.
Entergy will manage and own half the nukes, which contribute 20% of overall earnings. We’ll get the other half as stock of a new Spinco. The tax-free exchange is expected to take place in the third quarter of 2008.
The nuclear spinoff could be a real windfall, provided management can relicense the Indian Point nuke, [which is about 25 miles north of New York City].
Nuclear plants’ ability to produce huge amounts of carbon-neutral power has made fans of many environmentalists in recent years. There are still plenty of unreconstructed skeptics, however, including New York Governor Eliot Spitzer and Attorney General Andrew Cuomo. The pair is now opposing Entergy’s application to relicense Indian Point, on the grounds that it’s vulnerable to terrorist attack, and they’re joined by Connecticut Attorney General Richard Blumenthal.
At this point, the opposition looks more like election-year politics than serious policy. As a year-long National Academy of Sciences study recently concluded, closing Indian Point—which contributes 18% to 36% of the region’s power needs throughout the year—would immediately plunge New York into a full-scale electricity shortage and boost regional carbon dioxide emissions by 20%. Moreover, the Nuclear Regulatory Commission has the final say, and it’s almost certain to give the thumbs up.
The fact that politicians are willing to oppose Indian Point anyway, however, is a clear sign nuclear power faces formidable obstacles in the US to moving above its current 20% market share. That makes existing plants and their owners increasingly valuable commodities, including Entergy.
Entergy shares trade [at] nearly three times book value and 17.5x the mid-range of management’s 2008 profit projections. Nonetheless, the company’s a bargain as long as it keeps growing earnings and dividends [at] close to 20%.
Entergy is a buy up to $120 for those who don’t already own it. (It closed Friday above $111—Editor.)
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