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On Thursday, Barclays (LON:BARC) analyst Nicholas Campanella downgraded DTE Energy (NYSE:DTE) stock from Overweight to Equal Weight and adjusted the price target to $135.00 from the previous $137.00. The revision comes amid concerns about the company’s long-term earnings quality and balance sheet management. Currently trading at $130.38 with a market capitalization of $27 billion, DTE Energy maintains a relatively low volatility profile with a beta of 0.68. InvestingPro data reveals the stock is trading near its 52-week high of $131.66, suggesting careful consideration of entry points.
Campanella’s updated thesis highlights three main reasons for the downgrade. First, although DTE Energy is expected to benefit from the 45z tax credit over the next three years, the earnings from Renewable Natural Gas (RNG) are seen as emphasizing the company’s longer-term earnings quality issues. This is especially notable when compared to its in-state peer that operates as a pure-play regulated utility. Additionally, approximately 3% of earnings per share are set to roll off in the coming years, which could introduce volatility and require active management. Despite these concerns, InvestingPro analysis shows the company has maintained dividend payments for 55 consecutive years, with a current yield of 3.34%.
Secondly, the analyst points out that DTE Energy anticipates modestly higher equity issuance starting in 2028 due to an increased five-year capital plan. While the current credit cushion is deemed sufficient, with around 15% funds from operations (FFO) to debt credit metrics, this ratio is expected to normalize to approximately 13-14%, which approaches the downgrade threshold. As the company experiences prospective Rate Base (RAB) growth driven by accelerated capital expenditures, there may be a need to defend the balance sheet in the future. InvestingPro data supports these concerns, showing a debt-to-equity ratio of 1.99 and a current ratio of 0.71, indicating significant leverage and potential liquidity challenges.
Lastly, Campanella notes that DTE Energy’s stock is currently trading in line with the large-cap electric group based on 2027 earnings per share projections, with a 0.4% price-to-earnings (P/E) premium. However, Michigan peer CMS Energy (NYSE:CMS) trades at a roughly 7.5% premium and has a higher percentage of regulated earnings compared to DTE. Barclays values CMS’s Michigan segment at a 15% premium and DTE’s at 8.5%, in line with CMS’s current trading multiple. A discount to CMS is considered justified due to DTE’s experienced regulatory volatility in recent years.
The downgrade reflects Barclays’ reassessment of DTE Energy’s position within the sector, considering the potential challenges and valuation in comparison to its peers.
In other recent news, DTE Energy reported strong financial results for the fourth quarter of 2024, with revenue reaching $3.43 billion, surpassing the forecast of $3.17 billion. However, the company’s earnings per share (EPS) of $1.51 fell short of the expected $1.57. The company’s operating earnings for 2024 stood at $1.4 billion, with an operating EPS of $6.83, hitting the high end of its guidance. Analysts at BMO Capital maintained a Market Perform rating on DTE Energy while raising the price target from $125 to $135, citing increased confidence in the company’s growth potential.
Additionally, DTE Energy has set new performance metrics for executive compensation, aligning them with financial and operational performance goals for 2025. The company’s Long-Term Incentive Plan (LTIP) will focus on long-term growth and profitability, with executives eligible to earn up to 200% of target awards based on achievements. In regulatory developments, DTE Energy’s recent filing with the SEC highlighted its commitment to performance-based executive compensation, providing transparency into the metrics influencing top leadership remuneration.
DTE Energy continues to invest in renewable energy and grid reliability, with plans to allocate $10 billion over the next five years. The company aims for a long-term operating EPS growth target of 6-8%, supported by strategic investments and favorable regulatory outcomes. These recent developments underscore DTE Energy’s strategic focus on growth and operational excellence, with a strong emphasis on aligning executive incentives with shareholder interests.
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