Earnings Scorecard: PPL Corp. (PPL)

Following PPL Corporation’s (PPL) second quarter earnings miss on August 5, 2010, analysts’ sentiments on the company’s future earnings remain mixed. Positives in the quarter included encouraging results at the company’s Supply segment and the expected synergies from the pending E.ON acquisition. However, based on the financing-related dilution in late June, the company lowered its 2010 operating earnings guidance to $2.70-$3.05 per share. These factors have shaped analysts’ mixed opinions.

Earnings Review

PPL Corp. reported its second quarter 2010 earnings from continuing operations of 62 cents per share, missing the Zacks Consensus Estimate of 67 cents by 5 cents. However, the company’s quarterly profit recorded a solid rise of 94% from the year-ago earnings of 32 cents. The year-over-year increase in earnings was due to robust earnings at the company’s Supply segment.

Net revenues in the quarter fell 10% to $1.5 billion compared with $1.7 billion in the year-ago period.

We have discussed the quarterly results at length here: PPL Misses, Lowers Guidance

Agreement of Estimates

The overall trend in annual estimates remains mixed, yet showing more downward revisions than upward. For 2010, all 7 analysts covering the stock unanimously lowered estimates in the last 30 days, primarily due to the earlier than expected dilution and the resultant lowering of guidance for 2010.

For 2011, in the last 30 days, 5 (out of 10) analysts lowered their estimates while only one analyst raised his estimate. Downward estimate revisions for 2011 stem from the expectations of continued pressures on PPL’s basis differentials forward hedges due to increased transmission work, lack of basis liquidity and continued weakness in natural gas prices; and also due to projections of higher coal transportation costs going forward. Conversely, the upside to estimate was driven by the anticipated benefits of completing the pending E.ON acquisition by year-end 2010.

Magnitude of Estimates

Given the number of negative revisions, earnings estimate for fiscal 2010 fell by 42 cents to $2.81 over the past month. Earnings estimates for fiscal 2011, though offset by one upward revision, declined by 9 cents to $3.02. Over the past week, however, estimates rose by 1 cent for 2010 and declined by 4 cents for 2011.

Maintain Neutral

The major positives for PPL Corp. are its attractive location and diverse generation fleet, robust regulated business, strong hedge position and improved credit and cash flow profile, as well as projected dividend hikes.

Moreover, PPL’s outlook mostly centers on the proposed acquisition of E.ON US LLC, the parent company of Kentucky Utilities and Louisville Gas & Electric. During the second quarter, the company moved closer to completing the acquisition by raising roughly $3.5 billion through the sale of common stock and equity units to fund a major part of the acquisition. We expect the acquisition to lower the company’s risk profile, improve revenues, diversify its earnings stream, and reduce commodity sensitivity. The company expects to close the acquisition by year-end, based on regulatory approvals.

On the negative side, management noted that the company’s future hedges indicate weakness in the basis spread for 2011 and 2012, driven by increased transmission work and low natural gas prices. Further, the company sees higher coal transportation costs for 2011 and 2012, driven by both base rail charges and associated fuel surcharges. This could impact the company’s generation margins for 2011 and 2012, ultimately weighing on the company’s earnings.

However, we believe that the company could recover from the problem of weak basis spread once the Susquehanna-Roseland transmission line goes into service.

Looking forward, PPL has guided earnings at its Supply segment to improve in 2010 compared with 2009, driven by strong growth in energy margins. However, the company guided earnings declines for the Pennsylvania and International Delivery segments, due to expectations of higher operation & maintenance expenses and higher financing costs.

Given the company’s recent quarter results and the negatives discussed above, we remain on the sidelines for PPL shares, with a Neutral recommendation in the long term. In the short term, the company has a Zacks #4 Rank (Sell) on the shares.

PPL CORP (PPL): Free Stock Analysis Report

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