Wednesday, KeyBanc Capital downgraded Southern Co. (SO) shares to Hold from Buy. The brokerage lowered its 2010 EPS estimate to $2.35 from $2.45.
Analyst Paul Ridzon said that given his lower 2010 EPS outlook, shares appear to be close to fair value while trading at close to a 20% P/E premium. Given the lower earnings, the analyst believes a Hold rating is more appropriate, and are therefore downgrading from a Buy rating.
Recent CEO comments confirmed the analyst's concerns that the economic slowdown would present challenges that even SO's constructive ratemaking would have difficulty offsetting, particularly against the headwind of SO's "dribble" equity program. The analyst looks for little to modest growth until the economy starts to show a stronger recovery.
The analyst said that thus far in 2009, SO has issued an estimated $800 million in equity, or about 23 million shares. The analyst continues to view management's conservative profile, constructive regulation and a solid dividend favorably, but currently does not believe SO's valuation supports his former Buy rating.
The analyst believes 2011 could return SO to a trajectory of earnings growth, with economic recovery as well as the implementation of new rates in Georgia.
Currently, SO is down $0.06 or 0.18% and trading at $32.59.
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