SRI/ESG/CSR Research

Sempra

Sempra is a socially responsible energy company

This article was originally posted on the Street Insight section of thestreet.com 5/17/2006 4:01 PM EST

Natural gas is regarded as environmentally friendly. Thus, natural gas companies and utilities are seen as the most socially responsible energy companies. Here is a socially responsible energy play. I am suggesting that investors go long Sempra (SRE), which has a NYSE market cap of $11.57 billion at $44 per share.

Company Overview

Sempra is the largest natural gas distributor in the U.S. Its regulated subsidiaries include San Diego Gas and Electric and Southern California Gas. Sempra has several unregulated subsidiary entities: Sempra Generation, Sempra Commodities and Sempra LNG.

Sempra Pipelines distributes power and transports gas in California, Nevada, Arizona, Texas, Mexico and in Central and South America.

The Spark

This is another investment recommendation for which the spark comes from Richard Williams, an independent energy analyst with Harris Capital in Hartford, Conn.

Legal Costs out of the Way

The firm recently settled one of the largest ($24 billion) antitrust lawsuits, known as Continental Forge, and escaped by paying only $300 million in after-tax costs. Sempra settled Continental Forge for $377 million. In contrast, co-defendant El Paso paid $1.5 billion to settle.

Not out of the Woods Yet

According to Richard, "There still is a $3 billion unfair trade and deceptive suit outstanding with the State of California, emanating from shortages of power during the 2001 California energy crisis." Again, I think the Continental Forge settlement bodes well.

Valuation

From 1998 to 2004, Sempra's EPS averaged an annual increase of 20%. While the firm's EPS did not increase 20% in 2005, "its net income increase from $895 million to $920 million was still impressive."

COMPETITOR COMPARISON

 

 

 

 

SRE

Industry

Market Cap:

11.50B

2.88B

Employ­ees:

13,420

3.38K

Qtrly Rev Growth (yoy):

26.10%

10.60%

Revenue (ttm):

12.43B

2.99B

Gross Margin (ttm):

43.91%

32.55%

EBITDA (ttm):

2.51B

631.74M

Oper Margins (ttm):

14.50%

13.20%

Net Income (ttm):

944.00M

176.27M

EPS (ttm):

3.710

1.50

P/E (ttm):

11.96

15.30

 

Sempra increased net income 14% in the first quarter of 2006 and upped its dividend from $1.16 per share to $1.20 per share. The stock has been a long-term winner also, outperforming both PG&E Corp. (PCG) and Edison International (EIX).

Sempra

Price Targets

I expect the stock to go to $60.00 over the next 12 months as the shares sell on par with SRE's peers in the gas distribution industry. Risks include the usual corporate governance surprises, or perhaps there are more lawsuits on the way. I don't think so. Far more likely is another energy supply shock so large that it takes the entire energy sector down with it. While I don't expect such a shock, just to be on the safe side, I would protect myself with a soft stop at $40.00 and a hard stop at $35.00.

William Michael Cunningham

Eduction

  • B.A. (Economics) , MBA (Finance), A.M. (Industrial Organization)

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