So far this summer we’ve looked closely at three successful utilities in the Strategic Advantage portfolio — all companies that offer consistent dividends with limited downside risk.
Now let’s take a look at Entergy (NYSE: ETR), a diversified power company based in New Orleans with a market cap of $15 billion and $10 billion in annual sales, which was up 8.2% in July.
Entergy is best known as the second largest nuclear power generator in the United States. The company operates six nuclear plants in key markets including New York, the upper Northeast, and southwestern Michigan. Its nuclear plants have a tremendous cost advantage in their operating area because prevalent natural gas power plants set electricity prices. ETR’s plants typically operate with 60% profit margins because marginal production costs are minimal.
Entergy also provides power to customers in Southeast through traditional coal and gas fired plants. Regulation prevents competition within its operating areas in Arkansas, Louisiana, and Mississippi. In total, the company provides electricity to 2.7 million customers throughout the United States.
ETR’s diversified generation portfolio allows the company to perform consistently in any economic environment. Entergy’s nuclear plants thrive during periods of high natural gas prices while its utility benefits if natural gas prices are low.
In February 2010, the Vermont Senate did not renew the license of the Vermont Yankee nuclear power plant. The facility is scheduled to close in 2012 because an unacknowledged radioactive leak contaminated groundwater.
The closure of Vermont Yankee seems unlikely because it provides 56% the state’s power, yet the expectation is priced into stock as a near-certainty. Electricity rates on cash strapped Vermonters would increase dramatically because sufficient alternatives cannot be developed by 2012. Entergy officials are pushing for a second vote to reverse the decision.
Entergy has also been unable to earn its authorized 9.9% return on equity due to rate disputes with regulators in Texas and the local economic slowdown caused by the Gulf oil spill.
Entergy has risen nine times more than the average utility in the past 10 years, as shown above, though it has lagged its competitors in the past year. The resolution of regulatory troubles, which is on the horizon, should lift the cloud over the shares and help it reach parity with competitors.
The death of cap and trade legislation in the Senate will also help, as will a growing belief that nuclear energy presents a safe, inexpensive, low-impact alternative to coal, natural gas, and oil. The Department of Energy projects demand for electricity will increase 50% over the next 20 years. The Obama Administration supports nuclear power as an affordable and clean way to meet this future demand. Uranium fuel does not produce greenhouse gases and the total fuel costs of a nuclear power plant are a third of a coal-fired plant and a fourth of a gas-fired plant.
Utilities should continue to outperform the market as economic growth slows and investors look towards previously ignored non-cyclicals. Monopoly profits and high dividend yields also limit downside risk.
Entergy is currently priced at 11.3x forward earnings and pays a 4.2% dividend. Historically, the stock has traded at 16x earnings but low natural gas prices have lowered nuclear margins. A multiple of 13 combined with a $7.00 earnings estimate yields a price target of $91, which is 16% higher than the current price. Still a good buy.
As stated, Jon Markman was recommending shares of Entergy to subscribers of his strategic advantage newsletter. For more ideas like this, check out his Traders Advantage or Strategic Advantage investment advisory services.
The Best-Kept Secrets at Vanguard are Revealed. If you’re ready for the inside help that gives you special advantages over other investors at Vanguard, sign up now for Dan Wiener’s free online newsletter, Fund Focus Weekly. Each week you’ll get independent information on Vanguard’s best mutual funds to buy and sell, advance announcements of new funds, changes in management, plus much more! Sign up and get started today!
