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Pinnacle West Capital Corp.

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Pinnacle West Capital Corporation (PNW - Free Report) has been bucking the weak macro backdrop and moving higher since April 2012, based on the resilience of its regulated business. The uptick continued after the Zacks #2 Rank (Buy) reported significantly narrowed first quarter losses on May 3, 2012. This regulated utility stock has an above average dividend yield of 4.1% and is expected to deliver 12.9% earnings growth in the current year.

A Mixed First Quarter

Pinnacle West Capital’s first-quarter 2012 loss of 7 cents per share was in-line with the Zacks Consensus Estimate and narrowed 53.3% from the year-ago loss. Solid operational performance and reduced expenses more than offset the milder weather and lower customer usage.

Revenues, however, fell 4.3% year-over-year to $620.6 million, missing the Zacks Consensus Estimate by 7.8%. The decrease was due to lower electricity consumption by business and residential customers. This was partially offset by higher average electric customer growth of 0.8% compared with 0.4% in the year-ago quarter.

But the resilience in the cost structure of the company more than offset the magnitude of revenue decline, thereby driving 34% growth in operating income in the first quarter. The improvement in cost structure was mainly brought about by lower power plant maintenance costs.

Estimates Inching Higher

The Zacks Consensus Estimate for Pinnacle West show healthy year-over-year growth potential. For 2012, the estimate climbed 0.6% over the last 60 days to $3.37, indicating an estimated growth of roughly 12.9%. For 2013, the estimate increased 1.1% over the same timeframe to $3.55 per share, representing a projected year-over-year growth of nearly 5.1%.

Dividend Portraying Strength

Pinnacle West last raised its quarterly dividend in October 2006 by 5% to 52.5 cents per share and has been consistently paying the same amount ever since. This affirms a solid yield of 4.1%. This is more than two-fold the current yield on the 10-year Treasury Notes. The yield on the Treasury Notes has declined more than 30 basis points over the past two months to 1.6%. While the recent macro trend is driving to a less robust picture, the dividend story of Pinnacle West will act as a proxy to the asset classes of treasury bonds and gold futures.

Decent Valuation

Pinnacle West’s current valuation looks reasonable with its shares trading at a forward P/E of 15.0x, on par with the peer group average. The price-to-book of 1.4x is slightly above the peer group average of 1.3x. Moreover, Pinnacle West has a 1-year ROE of 8.7%, higher than its peer group average of 7.5%. Given a double-digit earnings growth prospect in the current year, the valuation presents a window of opportunity for investors seeking income and growth.

In a Nutshell

Pinnacle West operates in the relatively investor friendly regulatory domain of Arizona. In the recent past, the tribulations of the Arizona economy due to the global recession affected the growth of the regulated utility. However, Arizona's fundamentals allow Pinnacle to grow to stronger levels with the improvement of the economic environment. In addition, the company expects its customer count to grow at an annualized rate of 1.6% for 2012 through 2014, which will further enhance the company’s revenue base. Thus, a solid foundation for growth, stable earnings estimates, above average dividend yield and reasonable valuation make the stock a solid pick.

Incorporated in 1985, Pinnacle West Capital based in Phoenix, Arizona provides electricity services in the state of Arizona. The company is involved in the generation, transmission, and distribution of electricity from coal, nuclear, gas and oil, and renewable resources. The company, which has a market cap of $5.61 billion, owns or leases roughly 6,340 MW of regulated generation.

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