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Farrell: Two Utilities for Christmas

How generous can you get, beyond offering up two utility stock ideas as Holiday presents? Maury May, who follows small and mid-cap utilities for us at Soleil, has raised his target price for Wisconsin Energy (WEC; Buy rated; recent price $49) to $58 from $52.25. The company released three pieces of news recently, all of them positive. Wisconsin Energy got a final rate order from the regulatory authorities regarding their 2009 case. The regulators granted $89 million in relief based on return on equity of 10.4% to 10.5%. That allows Maury to finalize his estimate for the year to $3.15, midway between the company's guidance. His estimate for next year is $3.70 and the company issued guidance for next year to a range of $3.65 to $3.75. Consensus is at $3.71.

The company also settled a spat with Bechtel, the large construction company, over the building of two coal-fired plants. The settlement will cost WEC $61 million, but Maury thinks they will be allowed to recover most if not all of that amount. It's always good to get stuff like this behind you.

The current dividend of $1.35 provides a yield of 2.8%, which is well below the industry average. But with the rate case over, the Bechtel issue behind them, and the recent large construction program winding down, Maury thinks the company will raise its dividend early next year by as much as $0.20. He sees similar increases in 2011 and 2012. He has a target price of $58, which would be 15.3 times next year's earnings forecast discounted back one year by 7%. The 15.3 multiple is a premium to the group average of 13.3 times, which Maury sees as justified based on a solid regulatory environment and internally-funded growth prospects.

Kit Konolige follows larger capitalization utility stocks and he recently issued a Buy recommendation on the Southern Company (SO; Buy rated; recent price $33.88.) Southern does business in Alabama, Georgia, Mississippi, and the Florida Panhandle. He has a one-year target price of $37, which is based on 15.5 times his 2010 estimate of $2.40. That is a slight one-point premium to his group average of 14.5 times. He feels it is justified by a strong balance sheet, generally supportive regulation (the company is almost fully regulated), and historically above-average growth in its Southeast service territory. The dividend is $1.75, which provides a yield of 5.2%. Kit thinks there is a chance the company will increase the dividend in April of 2010. Southern is a big coal-burner and faces higher cost restraints, but the company has a solid history of "working with its regulators to minimize cost shocks from emission controls."

Personal income and personal spending both rose in November. On balance, the numbers were encouraging indicators for fourth quarter GDP. Income increased 0.4% and spending jumped 0.5%. Disposable income is up 3.1% from a year ago. "Real" disposable income (after inflation) advanced 0.2% in November after increasing the same last month. Real personal consumption was up 0.2% as well following a +0.4% gain in October. The savings rate held steady at 4.7%. Real disposable income is up three months in a row (at the same 0.2% rate each month coincidentally.) While that is not enough to fuel a consumer-led recovery, it is an encouraging sign for the next two quarters.

New home sales were just terrible. They fell 11.3% to a rate of 355,000, well below the consensus expectation of 430,000. The shortfall is being attributed to uncertainty that surrounded the first-time-buyer tax credit. New home sales are counted when contracts are signed, not at closing like existing home sales. With the credit being extended, you could presume that sales will pick up. But this reading shows a potentially fragile housing market that is dependent upon government aid. Or it could happen that if there were no government assistance, the market would find its own level, as auto sales have done. Auto sales on a monthly basis are better now than they were before the cash for clunkers program.

And why am I worried about Greece? Greece is 3% of the euro zone GDP. My pal David Kotok of Cumberland Advisors reminds us in a piece he wrote Wednesday that California is 13% of US GDP and would be something like the seventh largest economy in the world if it were a stand-alone country. I then read in the Dow Jones news wire that California is asking the Feds for $8 billion in aid. Great.

And thanks to Hersh Cohen for this one - When asked the secret of winning so many pennants, Casey Stengel said "I never could have done it without the players."

And back when insults were classy- George Bernard Shaw sent Winston Churchill two tickets to his new play and said, "I am enclosing two tickets to the first night of my new play. Bring a friend -- if you have one." Answered Churchill, "Cannot possibly attend first night. Will attend second night -- if there is one."

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