Industry Spotlight
High-voltage value
As Warren Buffett’s MidAmerican Energy Holdings rode to the rescue of Constellation Energy Group last week, analysts likewise began scouring the independent power sector for bargains. MidAmerican agreed to buy Constellation for $4.7 billion, or $26.50 a share, after liquidity concerns stemming from counterparty relationships with Lehman Brothers sparked a huge sell-off and caused Standard & Poor’s to place the company’s debt on watch for a downgrade. Shares fell to a low of $13, after trading as high as $67.87 the week before. Electricite de France SA subsequently offered $35 a share for the company, but Constellation’s chairman said the company accepted what it considers the best offer.
Lasan Johong, an analyst at RBC Capital Markets, says there is “significant opportunity” among independent power producers and “we believe the time has come to catch the falling knife.” He notes that many players have strong cash positions and little or no credit or counterparty risk with regard to companies like Lehman Brothers and Merrill Lynch & Co.
He is bullish on AES Corp., Dynegy Inc. and Reliant Energy Inc., saying price-earnings ratios haven’t been this low in years and that “we are at a loss for words to provide a rationale for current trading prices.” S&P analyst Christopher B. Muir is also high on AES. He expects “above-average earnings growth and an improving balance sheet over the next couple of years,” helped by emerging market growth and cost controls.
