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Market Price (5/10/2016): $22.10/share; ST-Target: $26/share; NIV: $36/share
CNP: We expect CNP to beat its guidance in 2016
Raising our ST-Target to $26 and NIV to $36 from $21 and $33, respectively. We agree with divestiture of CNP’s stake in Enable Midstream Partners (ENBL), but no update on status was provided. Although timing is poor, CNP would sell cheap but also have opportunity to buy cheap. Disposition of ENBL is likely to be dilutive, but lowers risk, which increases multiple, and proper redeployment of capital could make-up for the dilution. We don’t see CNP making a bid for Oncor T&D assets in Texas. We are less than thrilled at the prospect of converting CNP’s T&D assets in Texas to a REIT. Acquisition of Continuum closed as of 4/1/2016. This deal isn’t dazzling us but signals serious commitment to Energy Services business, and we’re not necessarily opposed to this modification in strategy. Retail strategy seems more tactical/execution vs. bold strategic moves. This isn’t glamorous, but done correctly could have good results for shareholder value. However, lack of strong utility and other regulated growth projects hamper CNP’s valuations, in our opinion, despite a healthy dividend yield, but we believe CNP’s targeted CAGR in AEPS of 4%-6% is well within sight and may take a boost with Continuum and redeployment of capital from disposition of ENBL. Demographics continue to provide a tailwind.