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Summary PPL’s complete focus on regulated operations will augur well for performance and stock price. Company’s U.S. regulated utilities are expected to enjoy healthy EPS growth of 8%-10% in the next five years. EPS growth is backed by attractive capital investment plan. Stock valuation will expand given strong regulated operations. PPL Corporation (NYSE: PPL ) is a suitable investment prospect for income investors seeking modest capital appreciation. The stock has an impressive yield of 4.8% and earnings for the company are expected to grow in a range of 4%-6% in future years, which will augur well for the stock valuation. PPL has been undertaking correct strategic decisions and has correctly directed its focus on regulated utility operations, which will fuel its future EPS growth. Furthermore, I think PPL’s transformation into a complete rate regulated electric utility company is favorable. The company plans to repatriate cash from U.K. operations, which will strengthen its cash flows and support growth investment and dividend growth. Moreover, the company has further de-risked the U.K. segment’s operations by reducing currency exposure through currency hedging. Moreover, the stock’s current valuation stays compelling in comparison to its industry. Correct Strategic Measures and Strong Growth Prospects Utility companies in the U.S. have been aggressively working to reduce their competitive business operations and increase regulated operations, as forward power prices have been volatile and weak. Increasing regulated operations will augur well for U.S. utility companies’ future performance as their revenues and cash flows will become more certain, which will lower business risk and result in stock valuation expansion. PPL has also recently completed the spinoff of its competitive operations, and the remaining business operations at the company make up a quality U.S. regulated growth story. In future, I think the stock valuation will expand because of the company’s improved risk profile. After the spinoff of the competitive operations and transition into a fully regulated utility, S&P upgraded the company’s credit rating to ‘A-‘ from ‘BBB’. Moving ahead, the company will continue to focus on its U.S. regulated operations, which will fuel its earnings growth. I think the company’s U.S. regulated utilities will enjoy EPS growth of almost 10% in the next five years, increasing to $1.34 in 2019 up from $0.90 in 2015, mainly driven by its attractive growth investments; PPL has a plan to make total capital investments of $18 billion in the next five years. The company expects its U.S. utilities to grow its earnings in a range of 8%-10% in the next five years. However, the company’s U.K.’s segment growth is expected to stay flat in the next five years, which will dampen the impressive U.S. growth; total EPS growth for the company is expected to be in a range of 4%-6% in future. Consistent with its initiatives to strengthen its consolidated growth, I think the company has rightly planned to repatriate $290 million of cash from the U.K. in 2015 and $300-$500 million in 2016-2017. The planned cash repatriation will allow the company to support its capital investments in future years and increase dividends. Moreover, in my opinion, the company has further de-risked the U.K. segment by lowering currency exposure through hedges. The company is now 100% hedged against the pound for 2015, 90% and 40% hedged for 2016 and 2017, respectively. Moreover, in order to meet carbon emission requirements, the company might opt to revive its shelved plan to construct a $900 million 700MW CCGT expansion at its Green River site. If the company decides to construct the plant, it could provide incremental EPS of $0.05-$0.07 annually, and will help PPL reduce carbon emissions and help meet 150-300MW of shortfall anticipated for the near future. As the company continues to make progress with its plans to focus on regulated operations, its performance has been improving. Given the company’s strong performance in the first two quarters of 2015, PPL has increased its EPS guidance from $2.05-$2.25 to $2.15-2.25 . In addition, given the increase in revenues and cash flows certainty because of complete focus on regulated operations, I think dividend growth for the company will stay strong, which will bode well for the stock price. PPL offers a yield of 4.7%. Separately, the stock’s current valuation stays compelling, as it is trading at a forward P/E of 13x, versus the industry forward P/E of 16x. Given the increased focus on regulated operations and strong earnings growth prospects, I think the stock valuation multiple will expand. Summation The company’s future growth prospects stay strong and it is on track to delivering a healthy performance in future years. The company’s complete focus on regulated operations will augur well for its performance and the stock price. Also, the company’s U.S. regulated utilities are expected to enjoy healthy EPS growth of 8%-10% in the next five years, backed by its attractive capital investment plan. Moreover, the stock valuations stay attractive, as it is trading at a forward P/E of 13x , in comparison to the industry forward P/E of 16x . Moving ahead, given the strong regulated operations, the stock valuation will expand. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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