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Market Price (2/28/2017): $27.32/share; ST-Target: $34/share; NIV: $50/share
Lower-risk but not necessarily lower return; continues to perform well
Raising our ST-Target to $34 from $28 and our NIV/share to $50 from $44 on our belief that CNP will perform at the higher end of 2017E AEPS and our concurrence with management that CNP will perform at the higher end or even above its targeted 4%-6% CAGR in AEPS in 2018. We agree with divestiture of Enable Midstream Partners (ENBL), and CNP gave OGE a 60-day right of first offer (ROFO) notice. We were mistaken about OGE taking advantage of its ROFO; appears CNP is still looking at 3rd-parties. Disposition of ENBL is likely dilutive, but lowers risk, which increases multiple, and proper redeployment of capital could make-up for the dilution, in our opinion. However, selling for stock makes little sense in terms of its risk profile, so we prefer sale for cash even with a tax consequence. It would not surprise us to see CNP delve back into pipeline business with proceeds from ENBL sale. Acquisition of Continuum isn’t dazzling us but signals serious commitment to Energy Services, and we’re not necessarily opposed to this modification in strategy. We are pleasantly surprised to see CNP guiding higher in 2017 and 2018. We believe that demographics continue to provide a tailwind and new Washington policies will provide additional uplift. Dividend yield likely to stay strong as well.