CMS Energy (CMS): 2019 Top Picks' Mid-Year Update

07/16/2019 5:00 am EST


Jacob Kilstein

Associate Analyst, Argus Research Company

Jacob Kilstein, an analyst for Argus Research, selected CMS Energy (CMS) as his favorite investment idea for 2019. The stock rose 22.5% in the first half of the year. Here's his latest update on the utility.

CMS Energy is a Michigan-based holding company with electric and natural gas utilities. The stock rose 19% in the first half of 2019.

We are maintaining our buy rating on the stock based on the company's strong growth in both EPS and dividends, which has been supported by capital investments and cost-savings programs.

Management continues to project annual EPS growth of 6%-8% - better than the average of 5%-7% for most utilities - with actual EPS growth remaining close to 7% over the last fifteen years.

The company also benefits from a favorable location in Michigan, with a rising population, a high proportion of skilled labor, a business-friendly regulatory environment, and relatively low exposure to severe weather events.

In January, the Michigan Public Service Commission granted CMS a rate increase of $89 million, with an ROE of 10%. The increase in rates is intended to pay for safety and reliability improvements, as well as an electric vehicle charging program.

In November 2018, the company filed a gas rate case request for $229 million at an ROE of 10.75%. The company expects a decision from regulators in 3Q19.

We believe that the company's consistent, above-average growth more than offsets concerns about the stock's high valuation and occasional earnings miss.

The shares trade at 22.4-times our 2019 EPS forecast, above the peer median of 20.1 for electric and gas utilities with fully regulated operations, and above the midpoint of the five-year historical range of 16.3-23.0.

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