Opinions
Greg Newman
Transalta Corp
TA-T
COMMENT
Dec 09, 2016
Stock price when the opinion was issued
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Premium contentPremium contentPremium contentOur PAST TOP PICK with TA has triggered its stop at $16. To remain disciplined, we recommend covering the position at this time. Combined with our previous guidance, this will result in a net investment gain of 46%.
He's looking at it. It's softened up considerably. Decent dividend payer, cut a few years ago but now back on track. High-quality company with share price having sold off. An opportunity, but he hasn't pulled the trigger yet.
Spike on chart due to strong earnings and a bunch of analysts giving it a "Buy". Got ahead of itself. Disappointment recently. He doesn't like buying at all-time highs, where there's often more downside than upside.
Premium contentTA holds a basket of high-quality power generation facilities including renewables. The company is prudently using some cash reserves to aggressively retire debt and buy back shares. It trades at 21x earnings and supports a 25% ROE. We recommend setting a stop-loss at $9.50, looking to achieve $16.00 -- upside potential of 28%. Yield 1.9%
(Analysts’ price target is $18.33)Premium contentLong a favourite of Stockchase Michael O'Reilly, this Alberta renewable energy company sank over 2% during April's tariff-induced slide. The sell-off helped to halve TA's PE of 40x from last September, and is now trading far lower than the industry's 33x. Even better, is the confident forward PE of 33.57x. Other qualities: a low beta of 0.55 and low payout ratio of 40% to support the 2.12% dividend yield. True, that yield lags its peers by 150 basis points or more, but TransAlta's ROE is 25.3%, towering over the sector's 8.97%. Anchored by strong free cash flows, the company is aggressively buying back shares as institutional shareholders own 67% of this stock. Lower interest rates are a tailwind for the entire sector
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Reached an agreement with Alberta for transition payments of about $97 million a year from 2017 to 2030. That news was better than expected and he upgraded it to a $7.50 target. It is a little higher than that, but still pretty cheap on a free cash yield. Trading at 15.3 versus its peers at lower levels. Its payout ratio on a free cash flow is 14%. He would prefer one with a bigger yield and one with the drop downs, Transalta Renewables (RNW-T).