ALE Allete Inc

We have maintained our Neutral recommendation on Entergy Corporation (ETR) on May 9, 2013 based on its year-over-year improvement in first quarter 2013 earnings and planned investments in infrastructure. Volatile commodity prices however pose a threat. The company currently has a Zacks Rank #2 (Buy).

Why the Reiteration?

Entergy Corporation posted first quarter 2013 earnings in line with our expectation, while missing on revenues. However, the company experienced a significant year-over-year improvement in its results driven by major generation investments in 2012. Total operating expenses during the quarter were 2,214.8 million, down from $2,440.5 million in the prior-year period.

Entergy’s nuclear fleet, along with its complementary and flexible fossil and hydro fleet, gives the company a distinct generation cost advantage over its fossil-fuel based competitors.

The company also plans to invest $6.7 billion over the three-year period from 2013 to 2015. Of this, only $3.3 billion will be for maintenance while the rest will go towards new capital projects. This will significantly boost the asset base of the company while raising the rate base.

Moreover, Entergy’s geographically-diverse mix of regulated and merchant operations insulates the company from regulatory bottlenecks and power-price volatility in a particular region.

Recently, Entergy Gulf States Louisiana, L.L.C. entered into a 30-year contract with Sempra Energy (SRE) for the supply of up to 200 megawatts of additional power to Sempra Energy’s proposed Cameron LNG liquefaction project in Hackberry.

The company is also making steady progress to spin off its electric-transmission business and merge the operation with ITC Holdings Corporation (ITC). Besides contributing to earnings, this transaction would allow the company to focus more on its generation and distribution businesses.

Entergy focuses on maximizing shareholder value through share repurchases and incremental dividend. In fact, the company is planning capital deployment through dividends and share repurchases of as much as $4 billion through 2010 to 2014.

Despite these positives we remain concerned about tepid growth at the company’s competitive business on account of lukewarm power demand in the Northeast, the fate of its Indian Point plant with respect to its re-licensing and volatile commodity prices.

Other Stocks to Consider

ALLETE, Inc. (ALE) also looks good in the space carrying a Zacks Rank #2 (Buy).
 

 
ALLETE INC (ALE): Free Stock Analysis Report
 
ENTERGY CORP (ETR): Free Stock Analysis Report
 
ITC HOLDINGS CP (ITC): Free Stock Analysis Report
 
SEMPRA ENERGY (SRE): Free Stock Analysis Report
 
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