"Calpine Corporation: Strong Buying Opportunity; 12-Mo Target $113; 24-Mo Target $144."
By Elizabeth A. Parrella, CFA, and Steven I. Fleishman (ML)
Reason for Report: Raising Q3 and Full-Year 2000 and
2001 Earnings Estimates; BUY/BUY.
Investment Highlights:
Raising Ests: Q3 $0.80, up from $0.65 (yr-ago
$0.37). Q4 $0.40, up from $0.35 (yr-ago
$0.24). Full-yr ’00 $1.85, up from $1.65; full-yr
’01 $2.10, up from $1.95. We have high
confidence in these forecasts.
Key Drivers: High power prices in CA into
Sept.; July and Aug. prices averaged
$100/Mwh, much higher than our ests.
Widening margins on some contracts as gas
prices rise due to heat rate advantage.
Why the Selloff: After hitting a new high of
$103, CPN is down 10% past 2 days. This is
partly the natural “breather” that the growth
end of the sector is taking, after a very strong
summer. Some investors have been concerned
about the potential for U.S. overcapacity,
which we believe is overdone (see page 2).
Valuation Remains Compelling: Now 44x and
33x our ’01 and ’02 ests, or 1.5x its 30%
growth rate, which looks likely to be exceeded.
Fundamental Highlights:
Tight markets will persist at least next 2 yrs;
CPN’s regional diversification a +. Forward
ests do not assume “abnormal” spark-spreads.
Therefore, continuation of upside surprises.
[snip]
Lynn |
