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PPL earns downgrade from Jefferies, lower price target at Barclays

JefferiesLLC downgraded PPLCorp. shares on July 14, and days later, Barclays Capital Inc.lowered its price target, albeit with a more optimistic earnings view.

Jefferiesdowngraded PPL shares to "hold" from "buy," and cut itsprice target to $38 from $41.50, expecting the company to generate lowerearnings as the British pound falls behind a stronger U.S. dollar.

"Thecompany's UK business accounts for half of the company's earnings and at thecurrent $1.31 USD/GBP, we expect the company to miss its 5-6% EPS growth rateand, unless the Pound has a significant rally, EPS to be flat todeclining," Jefferies analyst Anthony Crowdell noted.

PPLpreviously said Britain's vote to exit the European Union its fourutilities in the United Kingdom. However, it noted that a re-evaluation of itsearnings growth rate may be needed if there were to be a long-term reduction inthe value of the pound.

AlthoughPPL's UK utilities are having a strong year, Jefferies believes that PPL'searnings will fall flat or decline with exchange rates hedged at 41% for 2018and no hedges for 2019.

The companydeclared earlier that it is 93% hedged for 2016 budgeted earnings at $1.54 perpound, 89% hedged for 2017 at $1.58 per pound, and 41% hedged for 2018 at $1.56per pound.

Jefferiesinitiated an EPS estimate of $2.35 for 2019, decreased its EPS estimates of thecompany by 5 cents to $2.30 for 2016 and $2.40 for 2017, and lowered its 2018EPS by 15 cents to $2.35.

Jefferiesalso expects the UK inflation adjuster, which provides incremental revenuesbased on the inflation rate, to drag the company's earnings.

Barclays onJuly 18 lowered its price target on PPL shares by $1 to $42 with an "equalweight" rating, and initiated an EPS estimate of $2.45 for 2019 and $2.63for 2020. Barclays' EPS estimates for 2016-18 are $2.31, $2.44 and $2.42,respectively, compared with its previous estimates of $2.31, $2.41 and $2.40.

Barclaysbelieves that PPL can boost its EPS at 5% to 7% if the currency hedges aremonetized and put into transmission CapEx.

"Wecalculate the hedges are worth $437M at market and $520M using BarclaysResearch forecasts. Reinvesting the money in transmission could generate 7cents to offset the impact of market currency," Barclays analysts noted.