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On Mar 22, we downgraded energy company, Pepco Holdings Inc. (POM - Analyst Report) to Underperform from Neutral based on the company’s lackluster performance in the fourth quarter and full year 2012.

Why the Downgrade?

Pepco Holdings’ fourth quarter revenues as well as EPS of $1.13 billion and 19 cents missed the Zacks Consensus Estimates of $1.29 billion and 20 cents, respectively.  The 2013 earnings guidance of $1.05 to $1.20 per share is pegged lower than the 2012 level.

Following the release of fourth quarter results, the Zacks Consensus Estimates for the first and second quarters went down by 15.8% and 8% year over year, respectively. The Zacks Consensus Estimate for 2013 following the quarterly trend has gone down 6.1% to $1.14 per share.The bearish sentiment is also echoed in the company’s current Zacks Rank #4 (Sell).

Cause for Concern

Pepco Holdings requires constructive regulatory decisions to recover infrastructure investment already made by the company. The company has planned investments of $5.9 billion in its electric system over the next 5 years. However, the rate case decisions in 2012 were unfavorable and if the same trend continues this year Pepco will find it difficult to recover the costs and sustain systematic development work.

Pepco Holdings’ transmission facilities are interconnected with the transmission facilities of its neighboring utilities and are part of the interstate power transmission grid. Due to the interconnected nature of the grid, any outage at neighboring utilities could impact Pepco’s operations and hamper service reliability.

Other Stocks to Consider

While we prefer to avoid Pepco Holdings until we see signs of improvement in the company's performance, other energy stocks worth a look are Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), Otter Tail Corporation (OTTR - Snapshot Report) and Pike Electric Corporation (PIKE - Snapshot Report). All are Zacks Rank #1 (Strong Buy) stocks.

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