Robert Kwan comments re: Fortis Further to my previous comment...
In a research report released Tuesday titled The buffet is open and there is something for everybody, RBC Dominion Securities analyst Robert Kwan said he expects the market to “position more offensively in the coming year, both within the Canadian Infrastructure sector and more broadly with respect to the overall market.”
Accordingly, he sees regulated utilities stocks to be a source of funds within portfolios, prompting him to lower his rating for Fortis Inc. (to sector perform from outperform)
“We believe that Fortis has been a ‘go to’ stock for Canadian investors with multi-sector mandates seeking a defensive utility and we expect that FTS will continue to be viewed that way for the foreseeable future,” said Mr. Kwan. “As such, we believe that the shares will be a source of funds for investors looking to rotate more offensively within the market. However, for investors with a more defensive posture, we believe that Fortis remains well positioned as a solid defensive choice within the Canadian regulated utility sector.”
The analyst also warned of potential earnings for 2021, namely forex, noting: “For most of the last three years, the foreign exchange rate has been in a range of $1.29–1.35 Canadian dollars per U.S. dollar, which spiked into the $1.40 range during the depths of the COVID-related downturn. Since September 2020, the U.S. dollar has weakened from about $1.34 to roughly $1.28 today. We calculate that a $0.05 change in the USD/CAD exchange rate results in an approximately $0.06 per share impact on 2021E EPS (about 2 per cent). Combined with potential negative EPS revisions driven by a weaker U.S. dollar, we see potential for additional downside in consensus EPS for 2021 due to the recent Tucson Electric Power rate decision.”
Conversely, Mr. Kwan did say positive longer-term fundamentals remain intact.
“We believe there are a number of positive secular tailwinds for the sector that ultimately should result in regulated utilities being able to sustain mid- to high-single-digit rate base growth profiles,” he said. “Specifically, decarbonization of electricity generation and overall electrification are trends that we expect to result in attractive long-term growth for regulated utility stocks.”
With his downgrade, he maintained a $60 target for Fortis shares. The average on the Street is $59.50.
“In the near term, general stock market weakness, whether that be due to vaccine ineffectiveness and/or material delays relating to the rollout of vaccines, a third wave or some other shock to the system, would lead us back to favouring defensively positioned regulated utility stocks,” said Mr. Kwan. “Over the longer term, the positive fundamentals for regulated utilities naturally lead us to favour utility stocks, which could come back into focus as the market rally matures.”