Back in 2015, Entergy (ETR) — a stock in our Growth Portfolio — was downgraded to a "hold," where it has stayed — until now. I’ve now seen fit to boost the stock to a "buy," explains Robert Rapier, editor of Utility Forecaster.
My predecessor — the former editor for Utility Forecaster — had downgraded Entergy because at the time, he viewed it as fully valued based on the fundamentals.
In addition, this Louisiana-based utility holding company was undergoing a transformation out of the merchant utility business. The uncertainty of navigating this transformation was deemed an additional risk on top of the valuation.
Since then, Entergy has made a lot of progress in transforming itself. Entergy is an electric utility that generates electricity through gas/oil, nuclear, coal, hydro, and solar power sources. The company delivers electricity to 2.9 million utility customers in Arkansas, Louisiana, Mississippi, and Texas.
Entergy is on track to exit the merchant power business by 2022. The company is also moving to lower its carbon dioxide emissions. In 2001, Entergy became the first U.S. electric utility to voluntarily commit to stabilizing greenhouse gas emissions.
This effort has resulted in an increase in Entergy’s natural gas-generation and renewable power portfolio. And, despite the decision to exit the merchant nuclear power business, the company’s five nuclear power units will remain an important part of the company’s clean energy portfolio.
Entergy is on its way to becoming a more fully regulated utility thanks to its strategic shift away from merchant generation. In 2013, 20% of Entergy’s revenues came from competitive businesses. In 2018, that segment had declined to 13%, and will continue to fall as it divests its remaining merchant nuclear plants.
Entergy’s transformation is starting to pay off for investors. In 2015 and 2016, Entergy lost $0.99/share and $3.26/share. The company bounced back to profitability in 2017, and it did even better in 2018.
GAAP earnings per share are projected to rise from $4.63 in 2018 to $5.21 in 2019. Over the next three years, the company is targeting a 5% to 7% growth rate for adjusted earnings.
I would be remiss not to mention the company’s Safety Rating. Entergy’s low rating is being driven by the company’s downturn in 2015 and 2016. Because the Safety Rating is a backward-looking metric, the downturn caused Entergy to fall below its peer average in 7 of 8 Safety Rating categories.
However, the company’s financial metrics are strengthening. I also expect the company’s Safety Rating to improve over the next year or two. Keep in mind, this increased perception of risk is a reason Entergy is one of the few relative bargains among electric utilities.
