EPS trends are rising for this electricity transmission company.
ITC Holdings (ITC)
from Cabot Benjamin Graham Value Investor
ITC Holdings (ITC) is the first independently-owned and operated electricity transmission company in the U.S. The company moves electricity from power generators to local distribution systems through its own system or through neighboring transmission systems. ITC also schedules outages to allow for maintenance and construction, balances electricity generation and demand, and monitors flows over transmission lines to ensure safety.
ITC Holdings offers its products and services to utility companies, municipalities, cooperatives and alternative energy suppliers in Michigan, Iowa, Kansas and elsewhere. ITC’s four subsidiaries operate as independent transmission companies. The subsidiaries are subject to rate regulation only by FERC (the Federal Energy Regulatory Commission).
ITC benefits from FERC regulations that allow cost recovery for ITC’s capital spending and operating expenses. The company’s high capital budget allows ITC to upgrade power grids, connect renewable energy projects and replace aging equipment. This arrangement should continue to produce healthy revenue and earnings growth during the foreseeable future.
In November 2013, a complaint questioning FERC’s generous cost recovery and return on equity formula was filed against ITC and other transmission companies. Typically, such complaints are settled with modest or very small adjustments that have only a minor impact on earnings.
Revenues rose 16% and EPS surged 28% during the past 12 months. Revenues will likely rise 11% during the next 12 months ending 3/31/15, and EPS will climb 23% to 1.85. ITC’s proposed purchase of Entergy’s transmission assets was terminated by the Mississippi Public Service Commission. In 2012 and 2013, ITC incurred significant acquisition costs, which will not be present in 2014.
At 22.0 times current EPS, ITC’s stock price is reasonable. ITC has raised its dividend every year since 2005. Currently, it pays out only 36% of EPS allowing for substantial dividend increases in the future. My Maximum Buy Price is $37.25. ITC shares will likely reach my Minimum Sell Price of $53.95 within two years.
J. Royden Ward, Cabot Benjamin Graham Value Investor, www.cabot.net, 978-745-5532, June 2014