Morgan Stanley Warns That Gas Utility Valuations Are Far Too High

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Stephen C. Byrd of Morgan Stanley has written a report warning that gas utility valuations seem to be far too high, despite plenty of drivers that could allow growth in the industry.

Gas Utility Valuations Too High

“P/E, dividend yield, relative to electrics, relative to their own history – no matter how you slice it, gas utilities have gotten expensive (in part due to a significant uptick in M&A within the space),” writes Byrd. Gas companies, he says, should trade at a premium compared to ewlectrics companies on account of several factors, namely:

  1. Higher short-term growth on average
  2. Accelerated means of capital recovery
  3. Long-term growth propped up by supporting regulations and industry trends
  4. Few long-term business risks.

“Still, many of these factors are not new, so we find it increasingly difficult to be bullish the group at today’s elevated valuations,” Byrd commented.

Atmos Energy Corporation Downgraded

The rating for utilities giant Atmos Enery Corporation plummeted to Equal-weight, while the company’s shares continued to trade above price.

“We consider ATO’s growth outlook to be one of the strongest and lowest risk across the regulated utility sector, and management has executed extremely well on the company’s targets,” Byrd said. He also pointed out that the company’s shares seem fairly valued, having gained 14.5% in 2015.

ONE Gas Downgraded

After the Atmos rating, Morgan Stanley moved on to downgrade ONE Gas Inc. to Underweight, with the company’s shares outperformign for the past 18 months, leading to much higher premiums and significantly more hefty utility valuations.

“OGS’ above-average near-term growth now appears more than appropriately reflected in the stock and we view the company’s ~5% rate base CAGR as a better reflection of the business’ long-term earnings power. We thus have a difficult time justifying the substantial premium OGS is trading at on out-year estimates…We prefer cheaper utilities with more sustainable above-average growth,” Byrd concluded.

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