Entergy Results Disappoint

Entergy Generates Disappointing Q1’09 Results

Entergy Corp. (ETR - Analyst Report) released financial results for the 1st quarter of 2009 in which the company reported a 23.8% decrease in earnings of $235.3 million, or $1.20 per diluted share ($1.22 basic), compared to $308.7 million, or $1.56 per diluted share ($1.60 basic), in the year-ago quarter.

Ongoing operating earnings were reported at $252.6 million, or $1.29 per share, compared with $308.7 million, or $1.56 per share, in the comparable prior-year quarter.

Operating revenues in the reported quarter decreased 2.6% to $2.79 billion from $2.86 billion in the prior-year quarter.

Cash flow provided by operating activities decreased in the 1st quarter of 2009 as compared to the year-ago period due to lower net income, and changes in other regulatory assets.

Outlook: Entergy reaffirmed its fiscal 2009 outlook and expects EPS in the range of $6.70 – $7.30. As-reported guidance ranges from $6.56 to $7.16 and reflects $0.14 per share of projected dis-synergies associated with the expected spin-off of Entergy's non-utility nuclear business and plan to enter into a nuclear services joint venture.

Entergy is focusing on its traditional electric utility business with the imminent separation of its nuclear business.

However, destruction from Hurricanes Gustav and Ike in September 2008 affected the performance of the company. According to company estimates, total restoration costs are estimated to be within the range of $1.295 billion to $1.360 billion. Previously, the company showed strong resilience during two back-to-back destructive hurricanes in 2005.

Going forward, improving credit markets, a reasonable valuation, and steady recovery from hurricane damage, should continue to deliver strong earnings and cash-flow growth.

However, pending regulatory approvals in New York and Vermont for the proposed spin-off of its nuclear business is likely to further delay the spin-off transaction.

Looking ahead, the company's ability to achieve management’s targeted earnings growth will depend primarily upon intrinsic growth, the recovery of hurricane-related restoration costs, and the return of customers. In addition, the implementation of a formula rate plan, and significant free cash flow generation available for capital deployment for share repurchases, dividend hikes and/or debt retirement should collectively support management’s focus on creating shareholder value.

Over the past year, ETR traded within a P/E range of 9.2x to 18.7x then current-year EPS estimates. ETR shares currently trade at 11.2x and 10.6x, respectively, our 2009 and 2010 earnings per share estimates, or at a discount to the median and mean multiples for the diversified energy utility industry. Meanwhile, ETR trades at the upper-end of the range of its industry peers based upon relative multiples of book value yet in-line with its utility industry peers based on relative multiples of sales cash flow.

Therefore, with above industry average earnings growth expectations and a bullish outlook, we reiterate our BUY recommendation on ETR with a six-month target price of $78.00, or 11.9x our 2009 EPS forecast and 11.3x our forward 2010 EPS estimate. Price appreciation to our near-term valuation target, coupled with the $0.75 per share quarterly cash dividend – which appears sustainable and secure based on reasonable projected earnings payouts of 45.7% and 43.5%, respectively, of our 2009 and 2010 EPS estimates – represents annualized total return potential of 17.2%.

New Orleans-based Entergy Corporation is primarily engaged in electric power production and retail distribution operations. With 30,000 MW of generating capacity, it distributes electricity to 2.6 million customers in Arkansas, Louisiana, Mississippi, and Texas. The company also distributes natural gas to 240,000 customers in Louisiana.