On Friday, BofA Securities reinstated coverage on shares of Fortis Inc. (NYSE: NYSE:FTS), a Canadian utility holding company, with an Underperform rating. The firm set a price objective (PO) of $60, indicating a slight downside of 1% and a total return potential of 3%. The analyst highlighted concerns about the company's growth prospects and balance sheet strength.
Fortis, which operates 10 regulated utilities across North America, is anticipated to experience a below-average earnings per share (EPS) compound annual growth rate (CAGR) of 4.6% based on its current capital plan. The analyst suggested that while the company has potential for earnings growth through additional spending, this could be constrained by the need to issue equity to fortify its balance sheet.
The company's largest asset, ITC Holdings Corp., is the biggest standalone independent U.S. electricity transmission company. It is recognized as a stable asset with potentially attractive investment opportunities spanning the next decade. However, even with ITC contributing to a third of the total regulated EPS by 2026, the analyst expressed skepticism about Fortis's overall portfolio and financial leverage justifying its current valuation, which is more than 10% above the industry group average.
The report reflects a cautious stance on Fortis's financial health and growth trajectory, considering the company's strained balance sheet and the limited impact of its largest asset, ITC, on its overall earnings profile. The utility sector is often scrutinized for its ability to maintain growth and financial stability, given the capital-intensive nature of the industry.
In other recent news, Fortis Inc. reported strong second-quarter results for 2024, underscoring its commitment to a $4.8 billion annual capital plan. The company reported an earnings per share (EPS) of $0.67, marking an increase in adjusted EPS year-over-year. This robust performance comes despite challenging weather conditions, highlighting Fortis' resilience and strategic growth.
The company has invested $2.3 billion in capital projects to bolster system reliability and support clean energy initiatives. Fortis also confirmed that its rate base is projected to rise to over $49 billion by 2028, while maintaining its 4% to 6% annual dividend growth guidance through the same year.
On the regulatory front, the Iowa Supreme Court's decision allows ITC Midwest to proceed with the Tranche 1 projects. Meanwhile, Fortis is advocating for regulatory changes in Arizona to reduce lag. The company is also actively pursuing further growth opportunities in clean energy and electrification, as outlined in its 2024 Sustainability Report.
In terms of future expectations, analysts predict a significant increase in Fortis' rate base by 2028. The company is executing a growth strategy that includes expanding into clean energy and electrification, and is confident in maintaining its annual dividend growth guidance through 2028.
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