Utilities have killed on Wall Street in the past month, logging market-beating performances as a sector.
Let’s take a quick look at one of my favorites, Cleco (NYSE: CNL), an energy provider that serves 277,000 Louisiana residents and nearly 100,000 businesses.
Utilities are often seen as boring investments. They are highly regulated and have limited growth prospects. By digging beneath the surface, you can discover that some of these overlooked companies are excellent investments with consistent dividends and limited downside risk.
Most utilities are granted a monopoly over the territory they serve, and Cleco is no exception. It has had a charter since 1935 to light central Louisiana.
CNL collects $900 million in annual revenue and has a market cap of $1.71 billion, making it one of the smaller American utilities.
While Cleco is limited to a 10.7% return on equity, regulators recently approved a rate increase that will boost 2010 earnings.
The chart below illustrates that Cleco has outpaced most of its peers over the past seven years and recently achieved a new all-time high. At this point, all current shareholders have a profit, which makes them less likely to sell unless they have to use the proceeds to cover margin calls or losses elsewhere.
Cleco has been somewhat sheltered from the recession by the relative strength of Louisianan economy, which enjoys a 6.9% rate of unemployment due to its high exposure to the energy industry, compared to the 9.5% national average.
My research team spoke with CNL Chief Accounting Officer Russell Davis. He noted that Cleco would experience no “discernable effect” from the Gulf oil fiasco because most of the company’s customers live in the central part of the state. Any Cleco customer that lost a job in the fishing or oil industry still needs to power household essentials such as washing machines and air conditioners.
In February 2010, Cleco completed the Rodemacher 3, a next generation power plant that can burn biomass or petroleum coke, a byproduct from the oil refining process. The new unit insulates the company from swings in traditional commodity prices because the Rodemacher’s alternative fuels are easily accessible. The 600 megawatt plant also eliminated the company’s need to purchase power from competitors during peak hours.
With the opening of the Rodemacher 3, Cleco is selling some of its older power plants. A $300 million sale of its Acadia 2 unit to Entergy is scheduled to close soon while two smaller plants remain on the market.
Analysts expect Cleco, which pays a 3.6% annual dividend, to earn $2.21 in 2011, which prices the stock just under 13x its forward EPS estimate. I expect that number is a little low as analysts are overestimating the effect of the oil spill. If fear returns, investors will flock to low-risk, high dividend stocks like CNL. A $2.35 estimate coupled with a 14 P/E would place the stock at my $33 target. It’s a great buy on dips; if you own, keep holding.
For more ideas, check out my Trader�s Advantage and�Strategic Advantagenewsletters.
Triple-Digit Profits No Matter What the Market Does – You are not at the mercy of the markets. You can start adding triple-digit winners to your portfolio now if you’re ready to embrace the new rules of investing. Let Jon Markman show you how to make money every day in up markets AND down. � Download your FREE copy of this report here.
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Utilities have killed on Wall Street in the past month, logging market-beating performances as a sector. Let’s take a quick look at one of my favorites, Cleco (NYSE: CNL), an energy provider that serves 277,000 Louisiana residents and nearly 100,000 businesses.
Utilities are often seen as boring investments. They are highly regulated and have limited growth prospects. By digging beneath the surface, you can discover that some of these overlooked companies are excellent investments with consistent dividends and limited downside risk.
Most utilities are granted a monopoly over the territory they serve, and Cleco is no exception. It has had a charter since 1935 to light central Louisiana. CNL collects $900 million in annual revenue and has a market cap of $1.71 billion, making it one of the smaller American utilities.
While Cleco is limited to a 10.7% return on equity, regulators recently approved a rate increase that will boost 2010 earnings.
The chart below illustrates that Cleco has outpaced most of its peers over the past seven years and recently achieved a new all-time high. At this point, all current shareholders have a profit, which makes them less likely to sell unless they have to use the proceeds to cover margin calls or losses elsewhere.
Cleco has been somewhat sheltered from the recession by the relative strength of Louisianan economy, which enjoys a 6.9% rate of unemployment due to its high exposure to the energy industry, compared to the 9.5% national average.
My research team spoke with CNL Chief Accounting Officer Russell Davis. He noted that Cleco would experience no “discernable effect” from the Gulf oil fiasco because most of the company’s customers live in the central part of the state. Any Cleco customer that lost a job in the fishing or oil industry still needs to power household essentials such as washing machines and air conditioners.
In February 2010, Cleco completed the Rodemacher 3, a next generation power plant that can burn biomass or petroleum coke, a byproduct from the oil refining process. The new unit insulates the company from swings in traditional commodity prices because the Rodemacher’s alternative fuels are easily accessible. The 600 megawatt plant also eliminated the company’s need to purchase power from competitors during peak hours.
With the opening of the Rodemacher 3, Cleco is selling some of its older power plants. A $300 million sale of its Acadia 2 unit to Entergy is scheduled to close soon while two smaller plants remain on the market.
Analysts expect Cleco, which pays a 3.6% annual dividend, to earn $2.21 in 2011, which prices the stock just under 13x its forward EPS estimate. I expect that number is a little low as analysts are overestimating the effect of the oil spill. If fear returns, investors will flock to low-risk, high dividend stocks like CNL. A $2.35 estimate coupled with a 14 P/E would place the stock at my $33 target. It’s a great buy on dips; if you own, keep holding.
For more ideas, check out my Trader�s Advantage and�Strategic Advantagenewsletters.
Triple-Digit Profits No Matter What the Market Does – You are not at the mercy of the markets. You can start adding triple-digit winners to your portfolio now if you’re ready to embrace the new rules of investing. Let Jon Markman show you how to make money every day in up markets AND down. � Download your FREE copy of this report here.
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