We reiterate our Neutral rating on Progress Energy Inc. (PGN) as the company continues to face challenges in Florida. Also, the fluctuations in commodity prices, the uncertain regulatory environment and the pending approvals for its merger with Duke Energy Inc. (DUK), keep us on the sidelines.
On the positive side, though, we like Progress Energy for its ongoing merger deal with Duke Energy, which will make it the largest utility with over 7 million customers in 6 states. We believe the merger is a strategic fit for both companies and will be earnings accretive to the combined entity. We also like Progress Energy for its increased generation capacity, market expansion, cost-cutting initiatives, debt reduction, high dividend yield and improving balance sheet.
Raleigh, North Carolina-based Progress Energy is one of the nation’s larger pure-play electricity utilities with a solid opportunity for rate base growth in the long-term. Going forward, the company remains focused on effective cost and business management initiatives to meet the energy needs of customers.
Over the years, Progress Energy has transformed into a purely regulated utility company. Future prospects appear bright, given that it generates the majority of its earnings from stable, regulated electric operations. Furthermore, Progress Energy continues to pursue options to add new nuclear capacities at its Carolinas and Florida utilities.
Progress Energy’s fourth-quarter 2010 operating earnings came in at 45 cents per share, beating the Zacks Consensus Estimate of 43 cents but missing the year-ago numbers by 5 cents. Operating earnings for full-year 2010 were $ 3.06 per share compared with $ 3.03 per share reported in 2009. Fiscal 2010 earnings surpassed the Zacks Consensus Estimate by $ 0.03.
Progress Energy’s balance sheet at year-end 2010 was also strong with $ 611 million in cash and $ 1.97 billion available under its $ 2.0 billion credit facility. Total shareholder return for 2010 was 12.6%. Cash flow from operations for 2010 improved 11.7% to $ 2.5 billion. The company expects to continue growing its dividend going forward, fully supported by a strong cash-flow profile and financing plans.
Looking at 2011, Progress Energy expects operating earnings per share for 2011 in a range of $ 3.00 to $ 3.20 per share, which coincides with the Zacks Consensus Estimate of $ 3.12 per share. Although the company did not provide any cost guidance, in 2011, it aims to maintain its cost discipline and at the same time work on procedures relating to the merger with Duke Energy.
Given the solid 2011 outlook, strong long-term fundamentals and a robust balance sheet, we have a positive bias on the stock. However, we prefer to remain on the sidelines until its merger plans with Duke Energy receive the necessary regulatory consents. Progress Energy currently has a Zacks #3 Rank (short term hold rating).
DUKE ENERGY CP (DUK): Free Stock Analysis Report
PROGRESS ENERGY (PGN): Free Stock Analysis Report
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