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TransAlta Corporation (TAC - Free Report) carried its momentum into the first quarter of 2011 and delivered a 16% positive earnings surprise. This marked the company's second consecutive earnings beat.

The outlook appears strong for TAC over the next few years as it continues to expand its wind production. If consensus estimates materialize, TransAlta will grow EPS by 20% in 2011 and 13% in 2012 - not too shabby for a utility.

The company also pays a dividend that yields a juicy 5.3%. It is a Zacks #2 Rank (Buy) stock.

Strong First Quarter Results

TransAlta delivered strong first quarter results on April 26. Earnings per share came in at 36 cents, well ahead of the Zacks Consensus Estimate of 31 cents.

Revenue rose 17.5% year-over-year to $818 million. The gross margin expanded thanks to favorable pricing, higher hydro margins and higher wind volumes. These factors led to a 25% increase in comparable earnings.

Meanwhile, funds from operation (a good cash flow measure) increased 16.5% due to higher hydro margins and increased wind production.

The company continues to invest heavily in its wind operations. It announced in the first quarter that it is expanding development in Quebec with the 66 MW New Richmond wind project. The project is expected to cost around $205 million with commercial operations beginning by the end of 2012.

Double-Digit EPS Growth

Analysts have been raising their estimates for both 2011 and 2012 following strong Q1 results. The Zacks Consensus Estimate for 2011 is currently $1.15, representing 20% growth over 2010 EPS.

Analysts are projecting more double-digit growth in 2012 too. The consensus estimate currently stands at $1.30, equating to 13% EPS growth.

It is a Zacks #2 Rank (Buy) stock.

5.3% Yield

In the Q1 press release, management stated that it expects to achieve $800 to $900 million in funds from operations in 2011. This is up from $783 million realized in 2010.

This should allow the company to at least maintain its dividend throughout the year, which currently yields a hefty 5.3%.

Its payout ratio is 120%, however, which is well ahead of its target payout ratio of 60%-70%, so don't expect any significant dividend hikes soon.

Reasonable Valuation

Shares of TAC are trading at 18.2x forward 12-month earnings, a slight premium to its historical average forward multiple of 16.7x. However, the premium is justified by its strong projected growth rates.

The stock also trades at 1.5x book value, which is in-line with the industry average.

Company Description

TransAlta Corporation is a wholesale power generator and marketer with operations in Canada, the United States, and Australia. It owns and operates hydro, wind, geothermal, biomass, natural gas- and coal-fired facilities, and related mining operations.

The company also has an energy trading arm that trades energy-related commodities and derivatives. TransAlta is headquartered in Calgary, Alberta, Canada and has a market cap of $4.8 billion.

Read the March 17 article here.

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Todd Bunton is the Growth & Income Stock Strategist for

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