Wednesday, Credit Suisse downgraded Edison International (EIX) shares to Neutral from Outperform with a price target of $37.
Analyst Eggers downgrade the stock to reflect a combination of a less compelling outlook for the generation fleet and the relative performance of the stock. The analyst originally upgraded EIX for its strong, high growth utility business and option value at Edison Mission Group. At this point EIX is trading at 14.3x 2010 utility earnings, if including a $2 per share drag for corporate overhead.
Assuming SCE trades in-line with PCG (13.4x 2010 EPS), the analyst sees $2.5 already embedded in EIX's price for Mission, reducing room to outperform. While harder on valuation, the analyst appreciates the Edison Mission Group, or EMG, option value argument.
The analyst said that EIX has made it clear that there will not be capital infusion from the parent to Mission, which should therefore set the floor value for Mission at $0 plus upside of tax losses if shutting down. The company continues to explore alternatives for SOX / NOX compliance in Illinois with success using TrONA for SOX reduction and SNCRs to address NOX.
Reducing a potentially $2.5 billion capex obligation is key to EMG's value, although the analyst thinks some of this is seeping into EMG's valuation today as management gets more confident. Mission generation remains substantially open for 2010 (65% / 32% hedged for Midwest Gen / Homer City). While the analyst is cautious, EMG's open position could provide surprise with a better recovery (or be hurt by a downturn).
Currently, EIX is down $0.45 or 1.25% and trading at $35.67.
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