Time to buy CMS equity?

CMS stock has under-performed since the Michigan Public Service Commission Staff provided its testimony on November 15. While the company’s demand and Staff’s recommendation are far apart (staff proposed 20% of ask, but not on a comparable basis), I believe the settlement will be fair and the allowed ROE will be between 10.25% and 10.5%. Most important, this allowed ROE will sustain earnings growth of 5-7% over the next five years and enable the company to trade at a premium to its peers.
As a reminder, in a rate-case earlier this year, Consumers Energy requested a revenue increase of $196 mm, premised on a rate-base of $7.538 Bln, a 42.07% equity and an allowed ROE of 10.7%. The Michigan Public Service Staff recommended a revenue increase of $39 mm, premised on a rate-base of $7.309 Bln, 42.07% equity and an allowed ROE of 9.95%.

I also like the holdCo bonds, which trade wider than BBB holdCo peers (approx 300 bp for the 2014).

Please email me for details.

Disclaimer: I do not have a position in CMS and do not plan to initiate a position in the next 48 hours


6 thoughts on “Time to buy CMS equity?

  1. The Board of Directors of CMS Energy has voted to increase the dividend to $0.24 per share from $0.21 per share. As a result of the increase the dividend yield increases to approximately 4.2% and the payout ratio to 62%, approximately in-line with its regulated peers.

  2. After the close of markets last week, MPSC staff issued their recommendation on the ongoing general ratecase for Consumers Gas, which was worse than expected. Staff recommended a $21.9 million revenue reduction versus the company’s request for a revenue increase of $49.9 million. Most of the difference can be attributed to the difference in allowed ROE: company requested 10.7% versus staff recommendation 9.95% and certain disallowed costs (certain O&M costs and net gas costs). I expect the final ruling to be more favorable and remain positive on the stock.

  3. CMS Energy reported 1q2012 eps of $0.37 per share, slightly below consensus at $0.39, but down sharply from 1q2011 of $0.50. However, the miss was entirely due to milder weather and the company believes it can offset the impact of milder weather through efficiencies, economic growth, lower cost of financing, lower pension costs and some miscellaneous savings. Guidance for 2013 remains intact at $1.52-$1.55 per share. I see nothing that changes my view on the stock, and I maintain my $27 per share price target.

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