Barclays' 5 Best Utilities Stocks for 2012

NEW YORK ( TheStreet) -- Barclays Capital published a report Jan. 3 titled "Go With the Flow." Daniel Ford, Gregg Orrill, Theodore W. Brooks, Ross A. Fowler, M. Beth Straka and Noah Hauser have identified their most preferred power and utilities stocks for investment in 2012.

Here are the five stocks Barclays Capital is bullish about.

American Electric Power ( AEP) has been given an over-weight rating by Barclays Capital.

The company received a final judgment on its Ohio generation and distribution cases on Dec. 14, 2011.

The Ohio jurisdiction has substantial impact of 30% to 40% on American Electric Power's earnings, indicating a material future earnings growth.

Even though both cases were settled, the stock was still trading at a 12% discount through the day of the ruling two weeks ago.

However in the two weeks after the ruling, the stock outperformed the regulated group by 1.1% -- up by 7.6% vs. the 6.5% regulated group increase. Barclays Capital expects the outperformance to continue in 2012.

Moreover, American Electric Power, along with other partners, announced a plan to build a gas pipeline in Ohio for the purpose of transporting Utica shale gas to the Eastern marketplace.

Barclays Capital believes that American Electric Power will earn $3.10, $3.17 and $3.28 in 2011, 2012 and 2013, respectively.

Although the stock has performed well recently, it still trades at an 11% discount to its peers. This is despite the new earnings visibility and a 4.5% yield indicating a 10% premium to the average dividend yield for regulated utilities.

Barclays Capital has given a price target of $45 per share, indicating a regulated group utility multiple of 13.3 times Barclays' 2013 EPS estimate of $3.28, plus $1/share of cash. Jim Simons' Renaissance Technologies had the largest stake in AEP among the 350-plus hedge funds we are tracking.

Northeast Utilities ( NU)/ NSTAR ( NST) has been given an over-weight rating by Barclays Capital.

In the view of Barclays Capital, once the company's merger with NSTAR is finalized, it should create one of the best-positioned large-cap regulated utilities in Barclays Capital's coverage universe.

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NSTAR shareholders will receive 1.312 Northeast Utilities shares under the merger agreement. All currently required regulatory approvals have been granted, except for those from the Massachusetts Department of Public Utilities and the Nuclear Regulatory Commission. It is expected that the merger will be completed in early 2012.

Merger Agreement requirements expire April 16. Upon merger completion, Northeast Utilities shareholders will see their dividends to be on par with NSTAR's shareholders.

Barclays Capital believes the combination of an attractive 3.8% dividend yield, and dividend growth aspirations in line with earnings growth of 6% to 9% will continue to be a convincing investment feature.

Barclays Capital's $39 price target for Northeast Utilities shares is based on the 2013 earnings-per-share estimate of $2.63.

Its $49-per-share price target for NSTAR is based on Northeast Utilities 2013 estimated earnings per share of $2.63. Barclays Capital then applies a 5% discount for regulatory uncertainty. D. E. Shawhad the largest stake in NU among the hedge funds we are tracking.

OGE Energy ( OGE) has been given an over-weight rating by Barclays Capital.

OGE Energy combines a top-performing regulated electric utility with a rapidly expanding mid-stream gas pipeline business, Enogex. Enogex operates in the most profitable basin in the U.S. and contributes approximately 25% to the overall business net income.

OGE is exclusively positioned to achieve top-quartile long-term EPS growth and consistent steady dividend growth. Barclay's capital is forecasting a consolidated five-year (2009 to 2013) earnings per share growth of 9.5% from a utility rate base growth and expansions in Enogex's gathering and processing.

Barclays Capital values OGE on a forward price-to-earnings multiple for the utility component, and a forward EV/EBITDA for Enogex.

Barclays Capital has given a $59-per-share price target based on a consolidated 2013 estimate of $3.95 EPS. This consists of a $2.86 per share estimate for the utility, minus 4 cents for the Holding Co. base, on a 13.6 times regulated group P/E multiple.

This is also discounted by 5% for the regulatory risk associated with its pending rate case. This results in $36 to which $23 for Enogex is added, based on an assumed 81% ownership on an EV/EBITDA of $2.91 billion and a 9.5 times comparable multiple. Adage Capital Management had $37 million invested in OGE at the end of September.

Calpine ( CPN) has been given an over-weight rating by Barclays Capital. Calpine is the only spark spread generator in power. The company is most exposed to tighter power markets while being least sensitive among its peers to gas prices.

Barclays Capital likes Calpine for its primary exposure to Texas and California power markets, for the company's discipline of using excess cash flow to repurchase stock, and for CEO Jack Fusco who has a history of outperformance in the sector.

Barclays Capital believes the company has the best fleet of combined cycle gas plants in the industry. The company should strengthen its portfolio by looking at areas like the southeast or the north for expansion and then repurchase stock with the proceeds.

The company also expects to bring on-line the 75%-owned 619 megawatt Russell City project in 2013 along with the 120 megawatt Los Esteros expansion/conversion to combined cycle in California.

Barclays Capital has given a price target of $18 per share. This estimate is based on $18 for open EBITDA at 7.1 times $1.64 billion for the gas assets and $436 million at 9.6 times for geothermal.

The price target is also based on $17 for the asset value, which includes enterprise value of $14.5 billion and is $520 per kilowatt.

Billionaire Phil Falcone's Harbinger initiated a new position in CPN during the third quarter.

AES ( AES) has been given an over-weight rating by Barclays Capital. The new CEO Andres Gluski aims to initiate a quarterly dividend yielding 1.3% annually and take it to 2% to 3%. Gluski also aims to reduce geographic spread from 28 to 20 countries and cut costs aggressively. The company would raise $2 billion over the next few years through asset sales.

The 2012 EPS guidance is $1.27 to $1.37, with AES focusing on the midpoint of the range.

Looking from a base as per Barclays Capital forecast of 98 cents in 2011, drivers are new projects and the DPL merger accretion, the absence of DPL merger costs, cost cuts and free cash flow.

Downsides to this would be the Eletropaulo rate case in Brazil and currency sensitivities.

Barclays Capital's price target of $16 per share is estimated by averaging results of three independent valuations: $18 from a sum-of-parts valuation; $13 is estimated from 6.7 times $3.7 billion in 2012 proportional EBITDA less proportional net debt of $15.5 billion and 797 million shares.

And $15 is derived from 11.6 times the 2012 EPS of $1.38. All multiples use International Power as a comparable.

Steven Cohen's SAC Capital boosted its stake in AES by 13% during the third quarter.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.