We recently reiterated our Neutral recommendation on Progress Energy Inc. (PGN).
Raleigh, North Carolina-based Progress Energy is one of the nation’s larger pure-play electricity utilities with a solid rate base growth opportunity in the long-term. The company engages in regulated electricity operations in the southeastern U.S. as well as non-regulated businesses.
Over the years, the company has been focused on strengthening core operations while divesting non-core assets. Progress Energy’s transformation to a purely regulated utility company is essentially complete.
Future prospects appear bright given that it generates the majority of its earnings from stable, regulated electric operations. Furthermore, Progress Energy is pursuing the option of adding new nuclear capacities at both its Carolinas and Florida utilities.
Additionally, Progress Energy is pursuing a balanced strategy for a secure energy future – formulating aggressive energy efficiency programs, investments in renewable energy technologies and a state-of-the-art electricity system.
The company’s strategy is to invest in utility infrastructure to serve its growing customer base, uphold its constructive regulatory relationships, maintain a solid balance sheet and complete the sale of its remaining non-regulated businesses. Going forward, we expect the company’s investment in energy-related assets to have the potential for higher long-term returns.
The Recent Quarter & Guidance
Progress’ September quarter was disappointing, with EPS and revenues falling short of the consensus. Third quarter 2010 operating earnings at Progress Energy were $1.23 per share, which was shy of the Zacks Consensus Estimate of $1.27. However, quarterly results came in a penny higher than the year-ago earnings of $1.22.
Total revenues of the company in the third quarter were $2,957 million versus $2,823 million in the year-ago quarter, reflecting a growth of 4.7%. During the reported quarter, Progress Energy Carolinas contributed $1,414 million and Progress Energy Florida contributed $1,543 million to total revenues. Reported revenues came in lower than the Zacks Consensus Estimate of $3,062 million.
Nevertheless, Progress’ forward 2010 earnings guidance is encouraging, given the modest but steady signs of recovery of the Carolinas and Florida economies, effective cost management along with improving operations and execution results.
Progress revised its operating earnings guidance for 2010 to a range of $3.00 to $3.05 per share from $2.95 to $3.05 earlier. The company raised the low-end of the guidance by 5 cents to reflect the impact of favorable weather.
Our Take
Despite the disappointing quarterly results, we like the company for its increased generation capacity, market expansion, cost-cutting initiatives, debt reduction, high dividend yield and improving balance sheet. We believe these attributes along with a strong regulated asset portfolio and steadily improving Carolinas and Florida economies will help the company to improve its top-line and earnings going forward.
However, Progress’ Florida utility’s ability to earn close to its allowed returns remains challenged. Thus, we expect the stock to remain under pressure in the near term and maintain a cautious view on the stock.
Progress Energy currently has a Zacks #3 Rank (Hold), in line with its major peers NextEra Energy Inc. (NEE) and Southern Company (SO).
PROGRESS ENERGY (PGN): Free Stock Analysis Report
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