RBC Capital Doubles Price Target on PG&E (PCG) Stock; Here’s What You Need To Know
PG&E’s (PCG) long-suffering bulls finally have a reason to celebrate: California Department of Forestry and Fire Protection (CAL FIRE) cleared PG&E from involvement in the October 2017 Tubbs Fire in California that razed portions of Sonoma and Napa Counties and killed 22 people. The CAL FIRE issued its long-awaited report determining that the Tubbs Fire was caused by a private electrical system.
In reaction, RBC analyst Shelby Tucker lifted his price target for PCG shares to $16.00 (from $8.00), while keeping his rating at Sector Perform. (To watch Tucker’s track record, click here)
What does this mean for PG&E’s pending bankruptcy? Tucker tries to answer:
“While the CAL FIRE announcement could fuel further pressure on the Board to reconsider its intent to file for bankruptcy, we don’t believe it changes PG&E’s posture as it relates to a potential filing. Recall that the doctrine of Inverse Condemnation (IC) calls for the utility to pay for all liabilities for fires started by its equipment whether it was negligent or not . Even if it is allowed to recover these liabilities, PacGas might find financing these claims too onerous prior to receiving appropriate recovery guarantees by the California commission. We suspect that PG&E is taking a broader, holistic view of the business environment in California and seeks to permanently address IC. It seems to us that the rating agencies have no choice in taking a negative view on California utilities, as the next big wildfire could create another PacGas. Following the Tubbs report, CA Governor Newsom reiterated that a PacGas bankruptcy remains an “open-ended question” and called on the Commission to expedite changes to California’s fire policies.”
“We discount PCG’s recent peak market cap of $37 billion (just before the ignition of the 2017 wildfires) by 25% to account for the more severe than previously appreciated implications of IC. We then deduct roughly $19 billion of after-tax liabilities (down from $24 billion previously) from our adjusted market cap, yielding equity value of ~$8.5 billion, or $16 on a per-share basis,” the analyst added.
Overall, Wall Street is not convinced that PG&E’s reward is worth all the risk, especially when taking note that TipRanks analytics exhibit the stock as a Hold. Based on 13 analysts polled in the last 3 months, only 1 rates the stock a Buy, 10 maintain Hold and 2 issue Sell. Even with the price target hikes today, the 12-month average price target stands at $11.31, which implies about 8% downside from current levels. (See PCG’s price targets and analyst ratings on TipRanks)