Shares of electric utilities that also sell power to the wholesale market will likely soar in coming quarters because recovering demand will allow them to charge more and earn more, an analyst said Tuesday.
Stricter environmental rules and rising fuel prices also will help drive up the wholesale price of electricity, FBR Capital Markets analyst Marc de Croisset said in a research note Tuesday. That will likely boost earnings for companies such as FirstEnergy Corp. and Entergy Corp., that own power plants as well as distribution networks, he said.
By generating power, such "integrated utilities" tie their profits in part to the price of wholesale electricity.
FBR upgraded FirstEnergy's shares to "outperform" from "market perform" and increased its price target to $48.50 from $39. The research firm named Entergy its "FBR Top Pick" in the sector, replacing Pacific Gas & Electric Co. It increased its price target for Entergy to $82 from $79.
Regulated utilities' profits, by contrast, are more stable. Their rates are set by public utility commissions. Profits are protected, by also limited. They can't raise prices as demand increases. They are considered a safe investment during slow economic times.
Integrated utility companies get the benefit of that stability from their regulated subsidiaries and can have the higher earnings a power-generating business realizes when rising demand pushes up wholesale prices.
The sluggish economy has depressed share prices for integrated companies as investors opt for regulated companies and their recession-proof returns. But there are signs the trend is about to reverse, the analyst said. Integrated utilities are yielding dividends as high as those from regulated utilities for the first time since 2003, he said.
"Investors are paid to wait for the power market recovery," the analyst said.
Rising natural gas prices also could help the shares, he said. Gas currently costs about $4 per thousand cubic feet. If gas costs rose to about $5.50 per thousand cubic feet, the companies' share prices would increase relative to their earnings, FBR calculates.
Meanwhile, rising wholesale power prices will lift the companies' full-year earnings about 11 percent, FBR calculates. Some of the increase is will be driven by rising natural gas prices. New environmental rules will trim production by coal-fired plants, further tightening supplies, the analyst said.
• FirstEnergy shares jumped 85 cents, or 2 percent, to close at $43.80 on Tuesday.
• Entergy Corp. shares rose 53 cents to $69.37.
• PPL Corp. shares rose 12 cents to close at $27.25, then fell 3 cents to $27.22 in after-hours trading. FBR increased its price target for PPL shares to $30.50 from $29.50.
• Public Service Enterprise Group Inc. shares rose 28 cents to close at $31.88. FBR increased its price target for the shares to $35.00 from $34.50.
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