Investment Manager's Insight: BofA Securities Issues Underperform Rating for Fortis Inc. (NYSE: CN) with Cdn$60.00 Price Target
BofA Securities recently resumed coverage on Fortis Inc. (NYSE: CN) with an Underperform rating and a price target of Cdn$60.00. The firm's assessment is based on expectations of below-average earnings growth and potential limitations due to the company's financial position.
Fortis, a Canadian utility holding company operating 10 regulated utilities across North America, is projected to have a 4.6% earnings per share (EPS) compound annual growth rate (CAGR) based on its base capital plan. BofA Securities anticipates that any earnings upside from additional spending may be restricted by the need for equity to support the company's strained balance sheet.
The price target of Cdn$60.00 suggests a slight downside of -1% and a total return potential of 3%. This valuation reflects the analyst's view that the current portfolio and balance sheet do not justify a 10%+ premium compared to the group.
ITC Holdings Corp., a significant part of Fortis's portfolio, is the largest standalone independent electricity transmission company in the United States. It is considered a solid asset with potentially attractive investment opportunities over the next decade. Despite this, ITC accounts for only a third of the total regulated EPS split projected for 2026, influencing the analyst's rating.
Investors and market watchers will be closely monitoring Fortis's stock performance and future prospects following the reinstated coverage and set price target. The company's financial strategies and investment opportunities in the coming years will be of particular interest.
In a recent development, Fortis Inc. reported strong second-quarter results for 2024, showing an increase in adjusted earnings per share (EPS) year-over-year to $0.67. The company also reaffirmed its commitment to a $4.8 billion annual capital plan, with a focus on system reliability and clean energy initiatives. Fortis' rate base is expected to rise to over $49 billion by 2028, while maintaining a 4% to 6% annual dividend growth guidance through the same year.
Despite the positive results, BofA Securities reinstated coverage on Fortis with an Underperform rating, citing concerns about the company's growth prospects and balance sheet strength. The analyst noted a projected below-average earnings per share (EPS) compound annual growth rate (CAGR) of 4.6% based on its current capital plan.
On the regulatory front, the Iowa Supreme Court's decision allows ITC Midwest, Fortis's largest asset, to proceed with Tranche 1 projects. Analysts predict a significant increase in Fortis' rate base by 2028, as the company expands into clean energy and electrification. Fortis is also advocating for regulatory changes in Arizona to reduce lag, as part of its efforts to explore further growth opportunities.
In conclusion, Fortis Inc. faces challenges in its growth prospects and balance sheet strength, as highlighted by BofA Securities' Underperform rating. Investors should pay attention to the company's financial strategies and regulatory developments to make informed decisions about their investments in the utility sector.