University of Connecticut
Company: ITC Holdings Corp.Ticker: ITC Current Price: $31.77 Sector: Utilities Sub Industry: Utilities NetworkTarget Price: $36.75Stop Loss: $27.0052 Week High/Low: $31.86/$31.36TTM P/E: $22.38Forward P/E: $15.50TTM EPS: $1.62Beta: 0.06Credit Rating: (S&P) A-Rating Outlook: 4-StarMarket Cap: $4,883BAvg. Vol (30 day): 4.88BDividend Yield: 2.12%Company Background: ITC Holdings Corp is the nation’s largest independent electric transmission company. The company is based in Novi, Michigan. ITC’s value proposition is its investments to improve grid reliability, increase market access, and lower the total cost of delivered energy. The company operates through four subsidiaries in MI, IA, MN, IL, MO, KS, and OK. The peak load exceeds 26,000 megawatts along 15,000 circuit miles of transmission line. The Federal Energy Regulatory Commission regulates the transmission industry and their policy decisions can have indirect impacts on ITC’s Return on Equity. ITC is more exposed than others in the industry because 100% of its rate base is FERC-regulated transmission. Yahoo Finance. Industry Outlook: The Environmental Protection Agency mandates a reduction in carbon emissions from power plants of 30% from 2005 levels by the year 2030. To retrofit their infrastructure, many utilities have taken advantage of low interest rates. Adoption of smart grid technology has lowered costs and improved the reliability of delivered power. Additionally, the rebound in the U.S. housing market has driven utility demand higher. The Electric Power Transmission industry is at the mature stage of its lifecycle, usually serving as an income stocks with high and reliable dividends. Significant growth in the industry is expected because growing demand in outpacing the delivery and production capabilities in the U.S. Investment Thesis:Since the ROE regulation may change from the FERC’s decision, ITC is shifting its capital plans to focus more on contractual transmission projects. It currently has two projects in the pipeline. The first is the Lake Erie Connector, which will bring power back and forth from Canada to the U.S. The second, is a project shared with NRG Energy and York Capital Management to bail out the Puerto Rico Electric Power Authority with $3.5B. PREPA is about to default on $700M in loans and the new capital would allow the utility to modernize and upgrade. It is estimated that PREPA is owed $1.75B in surge charge. Additionally, the company last year had announced a repurchase program of $150 million common stock shares. However, ITC’s high gross and pre-tax margins indicate a differentiated product portfolio and good cost control. Valueline, Utility Dive.Investment Risks:FERC may look to cut ROE for the Industry in certain regions. Customers in the Midwest, where ITC operates, filed complaints that argued that allowed ROE was too generous. If the FERC cuts rates, ITC has said that every 10 bps drop in allowed ROE would cut earnings by $2.7 million. To prepare for this change, ITC set aside a $0.06 per share reserve in the possibility that a mandated refund was ruled. However, these rulings are not anticipated until 2016 or 2017. The ROA over the past 5 years suggests the high operating returns relative to ITC’s peers are unsustainable. The company may be overly investing its business with debt finance. The market prices ITC at a high P/B than its peer median. Morningstar3-5 Takeaways From Last Quarter’s Investor Call Transcripts: ? $1.2 Billion set aside for development, but no concrete plan.? Reduced range of Capital Spending ? The board just raised dividends $0.10/share (15.4% annually)Yahoo FinanceFinancial Performance:Discounted Cash Flow 201220132014Q1-2015Q2-2015Q3-2015Revenue 830.54941.271023.05272.49275.06273.19Operating Profit431.06496.06592.83149.45158.41149.64Net Income 187.88233.51244.0867.1372.3465.57Revenue Growth %9.65%13.33%8.68%5.36%4.49%1.13%EBITDA%537.57614.66720.87183.89193.99186.53Operating Profit %51.90%52.70%57.95%54.85%57.59%54.78%Net Income Margin22.6224.8123.8624.6426.3024.00D/E222.44223.84245.79246.65244.01261.86Interest Coverage 2.772.953.183.083.162.91EPS1.221.491.560.430.470.42PE Ratio 19.2819.6124.3422.5019.2919.32Current Ratio0.200.380.400.470.420.23ROE14.0515.4214.8714.3115.6515.23ROA3.623.943.683.573.733.54Dividend Per share 0.490.540.610.160.160.192010-142015-20Avg. Revenue Growth 10.528.99Avg. EBITDA Margin 65.8674%Avg. NOPAT Margin34.3937%Cost of Debt1.72Tax Rate36.75Cost of Equity 6.14WACC4.11Perpetuity Growth Rate (Terminal)4.1%Analyst Opinion Buy: 5Hold: 7Sell: 1Rating TargetMorningstar5/5 StarsS&P NetAdvantage4/5 Stars$36.00ValuelineB++$45-$55Relative ValuationTotal ReturnOGE USALE US CNL USCBB USInd. Average ITC US P/E17.9218.9920.3819.0918.3024.34P/B2.181.572.032.141.843.76Dividend Yield 2.683.552.863.07-1.51BEst PEG Ratio 2.79--5.043.34-1.88EPS (Last FY)1.992.912.563.46-1.56Rev Growth (Last FY)-14.4611.6315.752.24-8.69NI Growth (Last FY) 2.1219.20-3.704.55-4.53Operating Margin 21.8816.6122.5316.2317.7457.95Debt / Equity 87.9585.4884.06107.98127.32245.79Market Cap7,071.842,453.693,293.007,368.3519,760.466,296.36Prepared By: Jason HarrisITC Sector S&P 500YTD-21.84%-10.42%12.04%TTM-17.70%-7.35%0.686%Last 3 Years 59.84%31.23%63.45%Last 5 Years 132.84%52.22%84.44%CSR CharacteristicsCompany Industry ESG Disclosure14.0527.22Governance Disclosure Score51.7955.79Social Disclosure Score8.7728.58Environmental Disclosure Score15.5017.35 ................
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