XLU - PPL: A Growth-Rich Utility But Near Fair Value Neutral Chart

2023-07-13 12:30:48 ET

Summary

• The Utilities sector ETF (XLU) led stocks on CPI Day, with PPL Corporation (PPL) being a steady performer in the sector.
• PPL, which operates regulated electric and gas assets, has a robust growth outlook and strong balance sheet, with dividends expected to rise 6-8% through 2026.
• Despite some bearish trends, the stock is seen as a good buy on a dip to the mid-$20s, but it is currently not undervalued enough to upgrade from a hold rating.

The utilities sector ETF ( XLU ) led stocks on CPI Day earlier this week. That was unusual considering Wednesday was a very bullish day across the indexes. XLU notched its highest close in about two months. Relative to the S&P 500, though, the "utes" continue to underperform.

One domestic stock in the space has been range bound for the last three years while paying a steady dividend to investors along the rocky journey. I reiterate my hold rating on PPL Corporation ( PPL ).

Utilities Trending Lower Versus SPX

According to Bank of America Global Research, PPL operates regulated electric and gas assets in Kentucky, Pennsylvania, and Rhode Island. The Pennsylvania segment operates as a transmission and distribution business. The company's Kentucky segment, named Louisville Kentucky Electric, consists of two companies: Louisville Gas and Electric, and Kentucky Utilities. Louisville Gas and Electric focuses on regulated generation, transmission, distribution, and sale of electricity and natural gas in Kentucky.

The Pennsylvania-based $20 billion Electric Utilities industry company within the utilities sector trades at a high 27.2 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.6% forward dividend yield, according to Seeking Alpha. Ahead of earnings in early August, implied volatility is exceptionally low at 17% while the stock has a small short interest percentage of just 1.35% as of July 31, 2023.

Back in May, PPL reported a solid EPS beat. Operating profits per share verified at $0.48, a 3-cent beat, while revenue, up 36% YoY, also topped analysts' estimates. The management team reaffirmed its 2023 ongoing earnings forecast of $1.50 to $1.65 with a $1.58 midpoint. Dividends are seen as rising in the 6% to 8% range at least through 2026, per the management team. PPL has a more robust growth outlook than many of its peers while its balance sheet appears quite strong.

What the bulls assert about PPL is that there are no rate cases expected to impact the firm through at least 2026, so the path is somewhat free of upside cost pressures. Risks to its operations include integrating its assets in Rhode Island, adverse regulatory changes, capex execution, and natural disaster risks.

On valuation , analysts at BofA see earnings rising sharply this year with still-strong, though decelerating, per-share profit growth through 2025. The Bloomberg consensus forecast is about on par with what BofA projects. Dividends, meanwhile, are seen as rising at a steady pace over the coming quarters. With mid-teens to low 20s P/E multiples, the stock is not a screaming buy, though its EPS advancement is something to consider. We will look at that in a moment. With a near-market EV/EBITDA ratio but a yield more than twice that of the broad market, there are some solid signals today.

PPL: Earnings, Valuation, Dividend Yield Forecasts

PPL's forward operating earnings multiple is currently 16.8, a 9% premium to its historical average of 15.5, but also below the sector median P/E of 17.8. If we assume forward EPS growth of 8%, then the PEG is right near the S&P 500's average. With a higher yield and steadier profits, though, perhaps PPL is a better risk-reward play compared to many other stocks.

If we assume a 17 multiple, near the market average consider the profit growth outlook, and assume $1.65 of next-12-month EPS, then I see shares at a fair value near $28, so the stock is modestly underpriced today. A year from now, we could be talking about a more attractively priced stock if 2025 earnings amount to, say, $1.80.

PPL: Reasonable Valuation Metrics Considering the Growth Outlook

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Wednesday, August 2. The calendar is light on corporate event volatility catalysts aside from the reporting date.

Corporate Event Risk Calendar

The Technical Take

Not a whole lot has changed on the chart since I put a hold rating on shares in Q3 last year . The broad range between $24 and $32 continues, but there are some bearish trends in the RSI momentum index at the top of the chart. With high volume by price between $27 and that range-high, shares could be under pressure on rallies. A flat to downward-sloping long-term 200-day moving average is another possible bull hindrance.

Overall, I would buy the stock on a dip to the mid-$20s and take profits on approaches to $30.

PPL: Persistent Trading Range, Unimpressive RSI & 200DMA

The Bottom Line

I am closer to upgrading PPL to a buy, but it is just not undervalued enough today, and the chart still shows a bit more risk than reward potential. I reiterate the hold rating.

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