Wednesday, October 29, 2008

Marcial: FPL Group, an Attractive Power Play

Marcial: FPL Group, an Attractive Power Play

Who among the beleaguered investing community would be so bold as to predict the market's bottom at this point? Not very many, that's for sure. It's foolish, at best, to make such a prediction amid the current financial and economic turmoil, argue many of the best strategists on Wall Street.

But several stouthearted pros don't buy that, and they're now placing their money behind their forecasts that the market is finding a floor. (While it may not be a sure signal that stocks have touched their bear-market lows, the Dow Jones industrial average posted its second-biggest point gain ever—889 points, or nearly 11%—on Oct. 28.) "We have become more aggressive in buying stocks because we strongly believe the market is beginning to turn around and starting the process of pulling ahead to much higher ground," says Carl Birkelbach, president of Birkelbach Investment Securities.

Birkelbach has made several prescient market calls in the past. In September 1981, when the Dow was hovering at around 800, he placed ads in newspapers calling himself the "Lone Bull" and predicting the market had hit bottom and would rise to much higher levels. His forecast: The Dow will hit 8,000. Birkelbach did not specify the timing of the market's move, but 10 years later, in 1998, the industrial average shot up to 8,000—and then surpassed that level some months later.

Signs of a Bottom?

Birkelbach uses both fundamental measures and technical indicators in gauging the direction of the Dow. In September 2002, when the Dow stood at 7,900, he made another daring prediction: The Dow would hit 14,000 in the years ahead. True enough, in early October 2007, the benchmark index soared to more than 14,000. (Birkelbach, however, didn't predict whether stocks would retrench after such big moves.)

That brings us to October 2008 and the market's stunning fall from its year-earlier peaks. Here is Birkelbach's brief analysis of why he assumes stocks are reaching a trough. He notes that the European and Asian markets have retreated from their highs by about 40% to 50%, and the Dow has lost nearly 40% this year. In the past, he says, such huge declines presaged a market bottom. "Much of the financial distress and economic meltdown have already been discounted by the market, given such a massive market decline worldwide," he says.

If the worst of the bear's rampage is behind us, as Birkelbach figures, what is he buying? His current favorite: FPL Group (FPL), a public utility company that generates, sells, and distributes electric energy using natural gas, nuclear energy, and wind power. "It is the best and safest bet in these times of economic dislocation and financial stress," he says.

FPL's Florida Power & Light unit is the largest utility in Florida, serving about 4.5 million customers in the southern and eastern parts of the state. Its other unit, the unregulated FPL Energy, is the largest producer of wind power in the U.S., with a 30% share of the market at the end of 2007, generating 5,077 megawatts of wind power. FPL Energy is one of the largest U.S. independent power producers, generating roughly 16,000 Mw.

Core Holding

One other thing Birkelbach likes about FPL: its dividend yield of nearly 4%. "That is a comforting payout to shareholders" amid the current turmoil, he says. So the stock deserves to be a core holding in every portfolio, he says.

The stock, which climbed to a high of 72 a share in 2007, has been clobbered along with other equities and struck a low of 37 on Oct. 10. It has since edged higher, to 45 on Oct. 28. The company posted a 45% jump in earnings in the third quarter, to $774 million, on revenues of nearly $5.4 billion, in spite of the deteriorating economy, housing slowdown, and hurricane conditions in Florida that adversely affected its utility operations there.

But the stock's drop may indicate investors have discounted the weakness in the Florida market, where the growth in electric usage has slowed. "The stock is attractive for total return," says Justin McCann, an analyst at Standard & Poor's Equity Research, who recently upgraded his recommendation on FPL to a buy from a hold, although he reduced his earnings estimates by 5 a share for both 2008 and 2009. He now projects earnings of $3.84 a share for 2008 and $4.15 for 2009. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

"At the current share price, we consider FPL to be an attractive buying opportunity for investors with a 12- to 18-month time horizon," says Timothy Winter, senior analyst at investment firm Jesup & Lamont (JLI). He figures the shares are worth 55 a share. FPL has added 499 Mw of wind power generation capacity so far this year and continues to expect 1,300 of new wind capacity in operation by yearend 2008, Winter notes. However, the company scaled back its growth plans for 2009 because of the poor capital-market and economic conditions. Its approach to the problems will be to maintain flexibility to quickly ramp up projects should conditions improve and further reduce investment should conditions deteriorate, says Winter. He believes the annual dividend of $1.78 a share is "secure and growing."

Because of the economic and housing problems in Florida, says Winter, investors should "look beyond the valley of the next 12 months." They will be rewarded, he figures, when the economy improves. Given the company's growing investments in renewable energy, FPL "is the best-positioned power company to capitalize on the long-term macrodynamics of a future green-energy world," he says.

With the shares down some 40% from their all-time high of 73.75, the prospect of the stock recovering a lot of lost ground is part of FPL's appeal at its current price. You might say it's poised for regeneration.

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