Marcial: Pros See Sparks for NV Energy

Bulls call the Nevada-based electric utility a savvy infrastructure play and see plenty of upside to its pummeled shares

By Gene Marcial

BW's Gene Marcial

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Infrastructure is the latest buzzword on Wall Street. Since President-elect Barack Obama announced his program to create 3 million jobs, including the repair of aging infrastructure, the word has taken wing.

Obama's program covers not only traditional public works projects like road building, school construction, and bridge reconstruction. It also covers a wide swath of economic activity that provides a framework for economic growth and social development and modernization, including renewable power generation, transportation networks, wireless towers, and water, gas, and electric utilities.

"Companies in these varied types of global infrastructure activity are great vehicles for investment opportunities," says Robert Becker, portfolio manager of Cohen & Steers Global Infrastructure Fund (CSUAX). Spending on such projects will be huge, he says, because globalization and growing urbanization have put tremendous stress on the world's infrastructure in recent years. "The reason we think they are good investments is because such companies are characterized by the long life of their assets, strong cash flows, relatively inelastic demand, and their monopolistic nature," argues Becker.

Healthy Yield

One infrastructure utility stock in Cohen & Steers' portfolio is NV Energy (NVE), formerly called Sierra Pacific Resources, an electric utility that provides services throughout Nevada and the Lake Tahoe area of California. Although Nevada's legendary growth has slowed to a walk, for years it has been one of the fastest-growing states in the U.S. Among NV Energy's six operating units are Nevada Power and Sierra Pacific Power, which have helped make NV Energy very profitable and helped provide shareholders with a dividend yield of almost 4%.

NV Energy's stock has been relatively strong in the current tough environment, rising from a 52-week low of 6.90 on Oct. 10, 2008, to 10.22 on Jan. 13, 2009. But it is still below its 52-week high of 16.78 on Jan. 15, 2008.

Part of the stock's decline has been due to heavy selling by several hedge funds as they sought to meet huge investor redemptions, says Becker. Such big sellers included NV Energy's largest stakeholder, Horizon Asset Management, which unloaded 11.6 million shares as of Sept. 30, 2008, reducing its holdings to 10%. Kinetics Asset Management sold 10 million shares, cutting its stake to 2.32%. And Canyon Capital Advisors, which got rid of 1.5 million shares, sliced its holdings to 3.4%.

The company's fundamentals were not the reason for the hedge fund selling, Becker says. In fact, of the 12 analysts who base their analysis on fundamentals, none recommend selling the stock. Six recommend buying it, and the other six rate the stock a hold.

Appeal of Regulated Utility

One of the bulls is analyst Michael Lapides of Goldman Sachs (GS) (which has done banking for NV Energy), who rates NV Energy a buy based on its growth and earnings outlook. The growth potential is driven, he says, by asset acquisitions as well as expansion that has been authorized by Nevada's utilities regulator. "A total upside return of 71% exists, vs. average levels of closer to 35% to 40% for small [and] mid-cap utilities," says Lapides. He has a 12-month stock price target of 15.

Analyst Daniel Ford of Barclays Capital (BCS) rates NV Energy overweight. It is "the most undervalued opportunity in our regulated utility space," he says. The stock, he notes, trades at a 26% discount to the utility group based on his projected 2009 earnings estimate of $1 a share, and at a 33% discount based on his 2010 earnings estimate of $1.19. Ford's 12-month price target is 14. (Barclays has done banking for NV Energy.)

Another bull who rates NV Energy a buy is analyst Jonathan Arnold of Merrill Lynch, whose earnings forecasts are higher: $1.05 a share for 2009 and $1.20 for 2010, up from an estimated 95¢ a share in 2008. The company (a Merrill Lynch client) earned 89¢ a share in 2007. NV Energy's growth will be driven by investments in new energy generation and more infrastructure projects, says Arnold.

Expect infrastructure projects to continue producing potential market winners. "The [infrastructure] space has many companies that have yet to be discovered by Wall Street," says Cohen & Steers' Becker, noting that utilities are by far the largest segment. One of the attractions, he says, is that company earnings are generally regulated by government and predictable. In these times of volatility, "predictable" is good.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.