PNM Initiation Report

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Market Price (1/29/2016): $31.41/share; ST-Target: $42/share; NIV: $62/share

PNM: Resurgence of strong fundamentals

Incrementally improving regulatory framework, dedication to fundamental strategy, good execution, and strong financial management led PNM Resources (PNMR) away from 2008 precipice. However, challenges exist moving forward mostly due to lagging demographics and falling KWh sales in NM. Opportunities come from regulatory and environmental investments, renewable power, regulatory structure, and financial management. Specific opportunities exist at San Juan Generating Station (SJGS), Palo Verde Nuclear Generating Station (PVNGS), additional renewable investments, future potential transmission projects, regulatory restructuring, and energy efficiency program incentives. We believe demographic challenges will improve as NM’s economic profile improves, while – perhaps more importantly – KWh sales declines are likely addressed through regulatory realignment. And, we don’t expect financial missteps to repeat soon. Finally, we expect regulatory lag to diminish and evaporate due to pending changes in regulatory structures. Our ST-Target is $42, with LT potential to our NIV of some $62/share, particularly as growth investments take hold. BART was approved 12/16/2015.

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