Morgan Stanley Downgraded Pattern Energy, Raising Price Target

In a report published Tuesday, Morgan Stanley analyst Rajeev Lalwani downgraded Pattern Energy Group (NASDAQ: PEGI) to Equal-weight from Overweight, raising its price target from $26.50 to $31.00.

According to the report, PEGI shares are up 43 percent since the IPO in October, but it is believed that near-term upside is limited given the street's already ambitious asset purchase assumptions over the next two years.

“Risk-reward is skewed slightly to the downside, in our view, and our base case implies the shares are fairly valued,” the report noted. “Further, we already assume significant drop-downs over time (for example, 425MW in 2016) in arriving at our $31 price target. We could become more constructive if management demonstrated an ability to buy projects in excess of our current ~400MW assumption through 2015 (which could drive upside on dividend per share growth) or if project returns exceeded our current estimates.”

Some highlights from the report included:

-”Management has entered into purchase agreements for two projects totaling roughly 214MW of capacity.” -”We expect Pattern's initial asset base to generate $1.56 of cash flow and $1.25 of dividends per share.”

Some risks to PEGI include wind production as a highly variable, and a weak year could cast doubt on production estimates as well as vender concentration.

PEGI closed Monday at $31.42.