M&A Activity Prompts Argus To Upgrade Sempra Energy

San Diego-based utility holding company Sempra Energy (NYSE: SRE)'s acquisition of a majority stake in Texas' largest utility Oncor negatively impacted its first-quarter earnings, but Argus is bullish on the longer-term outlook.

The Analyst

Argus' Jacob Kilstein upgraded Sempra Energy from Hold to Buy with a new $119 price target.

The Thesis

Sempra's management team expects its new majority stake in Oncor to lift its annual earnings per share by 10 cents to 20 cents over the next four years and add $320 to $360 million to net 2018 earnings, Kilstein said in a note. Over time, the company's operation stands to benefit for multiple reasons, including favorable regulation, a growing rate base at the company's California utilities, investments in Mexican midstream infrastructure and the eventual completion of the Cameron LNG project.

The bullish case for Sempra's stock can also be justified amid expectations for continued dividend growth at an annual rate of 8 to 9 percent per year over the next five years, the analyst wrote.

Shares of Sempra are trading at an 18.7x multiple on the analyst's 2018 EPS estimate, which is a premium compared to the 17.3 median for comparable utilities. The multiple is also near the low end of its five-year historical range of 16.5x-25.4x and a $119 price target is based on a multiple of 22x, which is closer to the mid-point of the five-year range.

Price Action

Shares of Sempra Energy were trading around $102.56 on Monday afternoon.

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