Entergy an Opportunity For Conservative Income Investors

Charles Fishman: Like several other diversified utilities that have announced unregulated nuclear plant retirements well ahead of their license expirations, Entergy has sold one nuke, shut down another, and four active reactors will prematurely retire over the next four years. Entergy is in the process of selling three of these reactors to third-party companies specializing in decontaminating the sites in exchange for the assets of the nuclear decommissioning trust fund. We expect similar transactions with the other three.

Our increased confidence that Entergy can exit its merchant nuclear business without material negative cash flow and the constructive regulatory framework at its regulated utilities in Louisiana, Arkansas, Mississippi, and Texas were the primary drivers for recently increasing our moat rating to Narrow from None. We also lowered our assumption for the cost of equity in our discounted cash flow model to a level in line with narrow-moat peers. These changes resulted in our fair value estimate increasing to $96 from $83 per share.

We believe the market is too concerned about Entergy's declining operating EPS over the next five years as earnings from the nuclear plants are lost, instead of focusing on the underlying growth of its utilities and the attractive and growing dividend. In our opinion, this creates a buying opportunity for conservative income investors.