The companys earnings could also come under pressure

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lower the company’s allowed return on common equity. The company’s earnings could also come under pressure in the event of a downturn in the U.S. economy. COMPANY DESCRIPTION Public Service Enterprise Group is a combination electric and gas utility holding company, with regulated operations serving a large part of New Jersey, and nonregulated operations serving electricity markets primarily in the Mid-Atlantic and Northeast. It has two primary wholly owned subsidiaries: PSE&G (a regulated utility), and nonregulated PSEG Power (nuclear, solar and fossil-fuel-powered electric generating operations). At the end of 2016, the company operated a portfolio of 13,850 megawatts of installed generating capacity. INDUSTRY Our rating on the Utility sector is Under-Weight. The sector outperformed the S&P 500 in 2016, with a gain of 12.2%, after underperforming in 2015, with a loss of 8.4%. It underperformed in 2017, with a gain of 8.3%. The sector accounts for 3.1% of the S&P 500. Over the past five years, the weighting has ranged from 3.0% to 5.0%. We think the sector should account for at most 2%- 3% of diversified portfolios. The sector includes the electric, gas and water utility industries. By our calculations (using 2018 EPS), the sector price/earnings multiple is 18.6, a record high level and above the market average of 18.2. Earnings are expected to rise 5.7% in 2018 and 5.9% in 2017 after rising 21.5% in 2016 and falling 14.9% in 2015. The sector’s debt-to-cap ratio is about 55%, above the market average. This represents a risk, given the current state of the credit markets, particularly if corporate bond rates rise. The sector dividend yield of 2.8% is above the market average of 1.8%. VALUATION PEG trades at 16-times our revised 2018 EPS estimate of $3.11, below the average multiple for electric and gas utilities with both regulated and nonregulated assets. The stock also trades at a discount to peers based on price/cash flow and price/book. Other favorable factors are the company’s experienced management team, strong operating efficiencies, limited risk profile, solid cost controls, and generally positive relations with regulators. The company also has a strong balance sheet and continues to add new customers in an improving service area economy. Overall, we believe that the company is committed to optimizing the value of its regulated and nonregulated assets. We believe that Public Service has the potential to generate total annual returns for shareholders of 5%-6% over the next four to five years. Our target price of $56, along with the dividend, implies a potential total return of about 15% from current levels. On February 5, BUY-rated PEG closed at $48.84, down $1.20. (Gary Hovis, 2/5/18)
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M ARKET D IGEST - 17 - Argus Research Co. (ARC) is an independent investment research provider whose parent company, Argus Investors’ Counsel, Inc. (AIC), is registered with the U.S. Securities and Exchange Commission. Argus Investors’ Counsel is a subsidiary of The Argus Research Group, Inc. Neither The Argus Research Group nor any affiliate is a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of The Argus Research Group, Inc. The information contained in this research report is produced and copyrighted by Argus Research Co., and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been
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