What We Were Saying One Year Ago
PPL’s stock price on 2/25/08 was $47.97 when we cautioned, “The stock market has bid up PPL’s price to reflect the future earnings potential. But, that earnings potential is STARTING to show some signs of worry.” Unfortunately, PPL’s profits did disappoint in the subsequent months and the stock price dropped sharply. Its price closed at $27.89 on Friday.
Update on PPL-Here Are Standard & Poor’s Views as of January 27, 2009:
• The stock was off sharply in 2008, hurt, in our view, by the crisis in the credit markets, the drop in wholesale power prices, and the sharply reduced earnings outlook for 2008 and 2009. However, we expect the stock to gradually recover once the market looks beyond the expected sharp EPS declines in 2008 and 2009, to the strong increase projected for 2010. The stock's dividend yield (recently 4.1%) remains below the peer average (5.0%), and the effective payout ratio (77% of our 2009 operating EPS estimate) is also well above that of peers (61%).
• Risks to our recommendation and target price include potentially unfavorable regulatory rulings, significantly lower results from the unregulated operations, and a major shift in the average P/E multiple of the peer group as a whole.
• Our 12-month target price is $34. Since we expect PPL's current weakness in its wholesale power business to dramatically recover in 2010, we expect the stock to trade at about 19.4X our 2009 EPS estimate, reflecting a more than 40% premium to the average projected peer P/E multiple, based on our EPS forecasts for 2009.
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