Recommendation: Sell
Shares of Pacific Gas & Electric sizzled this summer before one of the utility's natural-gas pipelines exploded last week in San Bruno, Calif. The blast killed at least four people, injured several more, and destroyed nearly 40 homes. PG&E announced a $100 million fund this week to compensate residents. The stock fell 9% on the news, wiping out $1.5 billion in value, before recovering a little Tuesday. But shares still offer opportunity. Based in San Francisco, PG&E is one of the country's largest utilities. Even before the explosion, a cloud remained over the stock, as PG&E debates rate increases with regulators. Investors worry that a poor state economy and gubernatorial elections in the fall may limit those increases. Bank of America Merrill Lynch analyst Steve Fleishman argues that PG&E is still a smart buy. "The stock reaction on Friday seemed overdone, but we do expect some rockiness in the stock in the coming days," he wrote in a Monday note to clients. "Over time, we believe this headline risk will settle down and the stock is at an attractive valuation point to buy it." Shares trade around 13 times next year's earnings estimates and have a dividend yield of 4%. Fleishman expects PG&E to increase earnings by 6% to 7% annually over the next five years and to raise the dividend. He thinks the stock will rise to $49 in the next year. With its large investments in renewable energy, the utility looks like an even longer-term play.
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