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On Feb 7, we upgraded DTE Energy Company (DTE - Analyst Report) ahead of its fourth quarter earnings release to Outperform. Our bullish stance is based on its stable and growing utilities and its complementary non-utility businesses. Going forward, the growth momentum will be maintained by beneficial regulatory policies in Michigan, higher authorized rates for its regulated business, growth opportunities in its un-regulated businesses and an industry-high dividend yield.

Why the Upgrade?

DTE Energy’s regulated electric and gas utilities in Michigan generate a relatively stable and growing earnings stream. Also, a constructive regulatory environment in Michigan will aid in earnings growth. The Michigan Public Service Commission (MPSC) allows the company’s rate case request to be based on a forward test year in contrast to a historical test year as in other parts of the country. The MPSC has provided for an uncollectible expense tracking mechanism that helps in mitigating the impacts of unfavorable economic trends and a revenue decoupling mechanism that addresses changes in average customer usage. These techniques would lead to lower earnings volatility in the future.

Other Positives

DTE Energy is focused on improving its cost structure and directing capital investments toward renewable generation, utility infrastructure and environmental compliance assets. A focus on cost structure and operational improvements will help the utility attain a 5% – 6% long-term EPS growth target and shareholder return in the range of 9% to 10%. Improvement in the cost structure will also come in good stead as it will reduce the hike in customer bills.

DTE Energy has invested significantly in its non-utility businesses that diversify risk. Also, it has more growth opportunities in the Gas Storage and Pipelines and Power and Industrial Projects segments.

DTE Energy is looking for opportunities to monetize properties in 2013 as well as to optimize the productivity of the wells. It has rights to monetize shallow reserves above the Barnett Shale, specifically the Marble Falls formation. These drilling efforts have led to a large discovery of oil and high Btu gas that will add value to the asset base.

Other Stocks to Consider

DTE Energy currently has a Zacks Rank #2 (Buy). Other stocks to consider in the electric utility industry are Ameren Corporation (AEE - Analyst Report) and Pike Electric Corporation (PIKE - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and The AES Corporation (AES - Analyst Report) that carry a Zacks Rank #2 (Buy).

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