Buy Sempra Energy on Value

Impressive results in the first quarter, led by strong performance in its utilities pipelines and storage business, conclusion of general rate cases, operational REX-West, launch of its commodities joint-venture, and completion of its Baja California liquefied natural gas (LNG) terminal, collectively support the bullish outlook for Sempra Energy (SRE - Analyst Report).

Looking ahead, with the initiation of a $1 billion share repurchase program, new solar power contracts and a recently increased $1.40 annual dividend, we see consistent growth in earnings power. However, we note that the company may face difficulties from a higher level of capital expenditures. Nevertheless, in a valuation call given a discount in forward earnings valuation, we maintain our Buy recommendation on SRE with a six-month target price of $60.75, or 16.4x our 2008 EPS estimate and 13.3x our forward 2009 estimate.

SRE appears to be relatively well-positioned to benefit from core electric and natural gas operations, wholesale energy commodities marketing and trading, development of LNG resources, and earnings accretive acquisitions. Financially, the company’s 9% dividend increase to an annual rate of $1.40 per share in May 2008. This may attract conservative income-seeking investors.

The SRE common stock trades at only 15.0x and 12.1x, respectively, our 2008 and 2009 earnings per share estimates, or at a moderate discount to the natural gas distribution industry. We attribute the stock’s current earnings-based discount valuation to the uncertainty surrounding the lack of visibility into regulatory proceedings, declining business from the company s natural gas operations, as well as a below-industry average dividend yield.

We see earnings growth through 2009 driven by impressive profitability at one of its components, San Diego Gas & Electric, Federal Energy Regulatory Commission’s approval of the Rockies pipeline project, the joint venture with the Royal Bank of Scotland (RBS - Analyst Report) and additional asset sales.

Read the full analyst report on SRE

Read the full analyst report on RBS