Argus Research Powers up Entergy Corp.

05/06/2020 5:00 am EST

Focus: UTILITIES

Jacob Kilstein

Associate Analyst, Argus Research Company

We like utilities relative to other sectors in the current environment, as low interest rates make utility dividends more attractive. We also believe that demand for electricity and gas will hold up better during the pandemic than discretionary consumer spending, notes Jacob Kilstein, analyst with Argus Research.

We are raising our rating on Entergy Corp. (ETR) from "gold" to "buy". Entergy is an integrated energy company engaged primarily in electric power production and retail distribution.

It owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, including 9,000 megawatts of nuclear power, making it one of the nation’s largest nuclear generators.

The company’s regulated utilities deliver electricity to 2.9 million customers in Arkansas, Louisiana, Mississippi and Texas and natural gas to 194,000 customers in Louisiana and more than 13,000 employees.

We are raising our 2020 EPS estimate to $5.72 from $5.62 based on the better-than-expected 4Q results and higher guidance than we had expected. We are also establishing a 2021 estimate of $5.94. Our estimates could be lowered as a result of the pandemic.

Entergy has been reducing its exposure to wholesale markets in an effort to stabilize earnings. As part of this effort, it sold the unprofitable FitzPatrick and Pilgrim nuclear plants and is preparing to sell the Palisades plant. Entergy also closed its Vermont Yankee Nuclear Power Station in 2014.

Over the long term, we like the company’s strategy of investing in regulated utilities to replace aging infrastructure and improve reliability.

In the wholesale business, the company’s nuclear plants have low variable costs and should benefit from a recovery in non-regulated power prices, driven by the likely closure of many older, less efficient coal plants, especially in the Northeast. Lastly, we like the valuation and feel that the timing is right to upgrade the stock.

ETR shares have underperformed the S&P 500 over the last three months, declining 25%, compared a loss of 14% for the index. The shares have outperformed over the past year, however, rising 2%, compared to a 3% loss for the S&P. The beta on ETR shares is 0.84.

Entergy pays a quarterly dividend of $0.93 per share, or $3.72 annually, for a yield of about 3.8% (above the peer average of 3.7%). Our dividend estimates are $3.74 for 2020 and $3.82 for 2021.

We are setting a price target of $115, implying a projected 2020 P/E of 20.1, which we think is modest given the higher valuations of slower-growing peers.

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