Pinnacle West Capital Corporation (PNW - Analyst Report) has been bucking the weak macro backdrop and moving higher since April 2012, based on the resilience of its regulated business. The uptick continued after the Zacks #2 Rank (Buy) reported significantly narrowed first quarter losses on May 3, 2012. This regulated utility stock has an above average dividend yield of 4.1% and is expected to deliver 12.9% earnings growth in the current year.
A Mixed First Quarter
Pinnacle West Capitals first-quarter 2012 loss of 7 cents per share was in-line with the Zacks Consensus Estimate and narrowed 53.3% from the year-ago loss. Solid operational performance and reduced expenses more than offset the milder weather and lower customer usage.
Revenues, however, fell 4.3% year-over-year to $620.6 million, missing the Zacks Consensus Estimate by 7.8%. The decrease was due to lower electricity consumption by business and residential customers. This was partially offset by higher average electric customer growth of 0.8% compared with 0.4% in the year-ago quarter.
But the resilience in the cost structure of the company more than offset the magnitude of revenue decline, thereby driving 34% growth in operating income in the first quarter. The improvement in cost structure was mainly brought about by lower power plant maintenance costs.
Estimates Inching Higher
The Zacks Consensus Estimate for Pinnacle West show healthy year-over-year growth potential. For 2012, the estimate climbed 0.6% over the last 60 days to $3.37, indicating an estimated growth of roughly 12.9%. For 2013, the estimate increased 1.1% over the same timeframe to $3.55 per share, representing a projected year-over-year growth of nearly 5.1%.
Dividend Portraying Strength
Pinnacle West last raised its quarterly dividend in October 2006 by 5% to 52.5 cents per share and has been consistently paying the same amount ever since. This affirms a solid yield of 4.1%. This is more than two-fold the current yield on the 10-year Treasury Notes. The yield on the Treasury Notes has declined more than 30 basis points over the past two months to 1.6%. While the recent macro trend is driving to a less robust picture, the dividend story of Pinnacle West will act as a proxy to the asset classes of treasury bonds and gold futures.
Pinnacle Wests current valuation looks reasonable with its shares trading at a forward P/E of 15.0x, on par with the peer group average. The price-to-book of 1.4x is slightly above the peer group average of 1.3x. Moreover, Pinnacle West has a 1-year ROE of 8.7%, higher than its peer group average of 7.5%. Given a double-digit earnings growth prospect in the current year, the valuation presents a window of opportunity for investors seeking income and growth.
In a Nutshell
Pinnacle West operates in the relatively investor friendly regulatory domain of Arizona. In the recent past, the tribulations of the Arizona economy due to the global recession affected the growth of the regulated utility. However, Arizona's fundamentals allow Pinnacle to grow to stronger levels with the improvement of the economic environment. In addition, the company expects its customer count to grow at an annualized rate of 1.6% for 2012 through 2014, which will further enhance the companys revenue base. Thus, a solid foundation for growth, stable earnings estimates, above average dividend yield and reasonable valuation make the stock a solid pick.
Incorporated in 1985, Pinnacle West Capital based in Phoenix, Arizona provides electricity services in the state of Arizona. The company is involved in the generation, transmission, and distribution of electricity from coal, nuclear, gas and oil, and renewable resources. The company, which has a market cap of $5.61 billion, owns or leases roughly 6,340 MW of regulated generation.
This Week's Growth and Income Zacks Rank Buy Stocks
Shares of Home Properties, Inc. (HME) have been on a long-term uptrend since mid-2010, barring volatility in late 2011 on fears of a double-dip recession. This apartment REIT has put together six earnings surprises in the last seven quarters and has an impressive dividend yield of 4.4%. Strong fundamentals in the multifamily apartment market and solid first quarter 2012 results add further strength to this Zacks #2 Rank (Buy) stock. Earnings are presently expected to grow 12.1% in 2012 and 6.4% in 2013. Read the full article.
Earnings estimates for Cooper Tire & Rubber Co. (CTB) have been climbing since its strong first-quarter results, announced on May 2. The replacement tire maker has a solid dividend yield of 2.4% and is expected to deliver healthy double-digit earnings growth this year and beyond. The Zacks #2 Rank (Buy) stock also has a decent valuation. Read the full article.
Coach Inc. (COH) has beaten the Zacks Consensus Estimate for 11 consecutive quarters and pays out a healthy dividend that quadrupled in a span of three years. The company, famous for womens handbags, is a Zacks #2 Rank (Buy) and has a dividend yield of 2%. Furthermore, management provided an optimistic outlook for sustained double-digit growth in both the top and bottom lines for fiscal 2012, which was well supported by strong third-quarter 2012 results. Read the full article.
Shares of Brinker International, Inc. (EAT) have been steadily moving higher since mid-2010, driven by seven consecutive quarters of earnings surprises. Based on strong fiscal third-quarter results reported on April 23, management expects a two-fold EPS increase by 2015. Earnings are presently expected to grow 27.5% and 17.0% for fiscal 2012 and fiscal 2013, respectively. With a dividend yield of 2.1% and a Zacks #1 Rank (Strong Buy), this casual dining restaurant company makes a good investment proposition for growth and income-seeking investors. Read the full article.