Zacks senior utilities analyst Jon Kolb maintains a BUY recommendation on FPL Group, Inc. (FPL). Below are excerpts from his recent research report.
FPL stock continues to perform well despite the failed merger with CEG. The stock looks attractive with the addition of new wind projects, better hedged positions of sales in the forward market and some major projects including nuclear power projects in the pipeline. However, uncertainty over future revenue growth, poor performance at FPL Energy and an increasingly leveraged balance sheet partially dampen the growth prospects. Nevertheless, we maintain our BUY recommendation on FPL with a six-month target price of $62.50. Price appreciation to our near-term valuation target, coupled with the increased $0.41 per share quarterly cash dividend which we consider sustainable based on reasonable projected payouts represents annualized total return potential of 21.2%.
Growth prospects for the FPL Group appear bright, as it currently derives over 70% of consolidated earnings from stable regulated operations located in the faster growing and stable utility markets of Florida. The termination of the proposed merger between Constellation Energy and FPL Group did not alter our long-term bullish outlook of the company. Going forward, we expect robust customer growth and expansion of the company s generating assets to drive future earnings. During the last decade, FPL has successfully added more than a million customers and spent several billion dollars to upgrade its electricity system. During full year 2006, it invested $1.7 billion to enhance and expand its electric system generation facility.
Competitive wholesale markets in the United States continue to evolve and vary by geographic region. Revenues from electricity sales in these markets will vary based on the prices obtainable for energy, capacity and other ancillary services. FPL currently faces competition from other suppliers of electrical energy to wholesale customers and from alternative energy sources and self-generation for other customer groups, primarily industrial customers. Expanded competition in a frequently changing regulatory environment presents both opportunities and risks for FPL Energy. Opportunities exist for the selective acquisition of generation assets divested under deregulation plans or available from other competitors and for the construction and operation of efficient plants that can sell power in competitive markets. The major markets in which FPL Energy operates have shown signs of continued improvement since 2004, such as improved spark spreads and energy prices in ERCOT and NEPOOL. The combination of new wind projects, expected increase in contribution from merchant assets and asset acquisitions are expected to be the key drivers in supporting FPL Energy's growth over the next few years.
Read the analyst report on FPL
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