Our latest focus stock is Sempra Energy (SRE), which carries CFRA's highest recommendation of 5-STARS, or Strong Buy. Sempra Energy is a utility holding company with 88% of its 2019 sales in the U.S. and 12% in Mexico, notes analyst Christopher Muir in CFRA Research's The Outlook.
The company operates five segments: SDG&E, SoCalGas (SCG), Sempra Texas Utilities, Sempra Mexico, and Sempra LNG. SDGE's service area includes 4,100 square miles from Orange County to the Mexican border.
SDGE serves 1.47 million electric customers within a population of 3.7 million and 895,000 natural gas customers within a population of 3.4 million. SCG's service area includes 24,000 square miles of Central and Southern California, covering 6.03 million natural gas customers with a population of 22.0 million.
Sempra Texas Utilities owns an 80.25% interest in Oncor Holdings. Sempra LNG provides natural gas marketing, trading, and risk management services and sells electricity. Sempra Mexico develops, owns, and operates, or holds interests in, energy infrastructure in Mexico in two key energy markets: gas and power.
IEnova's gas business offers pipeline services for natural gas, LPG and ethane, as well as storage for LNG and LPG, and distribution of natural gas. IEnova is constructing marine and land terminals for the receipt, storage, and delivery of liquid fuels.
In its power business, IEnova operates a natural-gas fired combined-cycle plant and wind and solar power plants and is constructing additional wind and solar power plants. Sempra Energy owns 66.6% of IEnova as of December 31, 2019, and the remaining shares trade on the Mexican Stock Exchange.
Our Strong Buy opinion reflects our view of strong EPS growth driven by new projects entering service and its discount to peer’s valuation. SRE's utility segment has various projects in development that should add to its rate base. Also, it has filed for rate increases covering the period from 2019 through 2022. We see the startup in 2019 and 2020 of the Cameron LNG export project boosting EPS.
Activist investor interest has led SRE's board to change its makeup and initiate strategic reviews. Thus, SRE has sold its U.S. renewables business and two natural gas storage assets and announced agreements to sell its international utilities in Chile and Peru.
Our 12-month target price of $140 is 20.4x our 2020 EPS estimate, or a premium to peers, warranted by prospects for an above-peer three-year EPS growth rate. Risks to our recommendation and 12-month target price include unfavorable regulatory decisions and weaker economic conditions.
