On October 28, 2011, CMS Energy Corporation (CMS), the Michigan-based public utility holding company, posted mixed third-quarter 2011 results.
In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.
Quarterly Review
CMS Energy in the third-quarter 2011 reported an adjusted EPS of 53 cents per share, 2 cents above the Zacks Consensus Estimate and a penny above the year-ago figure. The upside in earnings came from higher rates.
However the bullishness was partially moderated by higher operations and maintenance expense associated with service restoration costs at the company's Michigan utility from a series of unusually severe summer storms. At the end of the third quarter 2011, the storm restoration costs were more than double the amount incurred in the prior-year period.
Operating revenue in the third-quarter 2011 was $1.5 billion, up 1.5% year over year. However, results were below the Zacks Consensus Estimate by $64 million.
Operating expense rose 2.1% year over year to $1.1 billion. CMS Energy reported operating income of $316 million, down $3 million from the year-ago quarter. Overall, the company reported net income of $140 million, down from $146 million a year ago.
CMS Energy reaffirmed its guidance for fiscal 2011 adjusted earnings of $1.44 per share, an estimated 6% rise from fiscal 2010 adjusted earnings. This is consistent with the company's long-term plan of 5%–7% annual earnings growth.
(Read our full coverage on this earnings report: CMS Posts Mixed 3Q as Costs Rise)
Agreement of Analysts
With the company reaffirming its earnings guidance for fiscal 2011, the majority of analysts have followed suit and stuck to their estimates for the current quarter. The sideways trend in estimates was due to the slow and predictable rebound of electricity sales of the company to pre-recession levels. The rebound however is at a predictable speed and is expected to return to pre-recession levels in fiscal 2012 only.
Over the last 7 days, 1 of the 7 analysts covering the stock has lowered its estimates for the fourth quarter of fiscal 2011. However for fiscal 2011 none of the 7 analysts have revised their estimates over the past week.
Magnitude of Estimate Revisions
The magnitude of estimate revisions has been however significant for the fourth quarter, in the past 7 days. Overall, the consensus estimate for the current quarter has gone down by 10 cents to 37 cents. The estimate for fiscal 2011 however remained constant over the last 7 days.
Our Recommendation
CMS Energy’s regulated electric power operations in Michigan generate a relatively stable and growing earnings stream. Over the long term, the company presents a strong growth story, given its favorable regulatory policies in Michigan, higher rates, a robust balance sheet, and incremental dividend.
But we believe these positives are embedded in the current target price, leaving little room for further upside in the near term. Also, we are concerned about the unfavorable macro backdrop, lower demand for electricity and pending regulatory cases.
The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. Some of its main peers include Duke Energy Corporation (DUK) and Entergy Corporation (ETR).
Jackson, Michigan-based CMS Energy is the holding company of Consumers Energy Company (Consumers) and CMS Enterprises Company (Enterprises). Consumers is an electric and gas utility company that provides electricity and natural gas to Michigan residents, and serves customers in all 68 counties of Michigan’s Lower Peninsula. Enterprises’ through its subsidiaries and equity investments is engaged primarily in independent power production.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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