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On Tuesday, JPMorgan analysts downgraded Dominion Resources, Inc. (NYSE:D) stock from 'Neutral' to 'Underweight', also lowering the price target to $52.00 from the previous $59.00. The stock, currently trading at $50.83, has fallen nearly 10% in the past week. The downgrade comes amid concerns about the growing risks associated with the company's Coastal Virginia Offshore Wind (CVOW) project. According to InvestingPro analysis, the company's current valuation suggests it is slightly overvalued based on its Fair Value metrics.
Analysts at JPMorgan highlighted several factors contributing to the heightened risk profile for Dominion Resources. The CVOW project still requires a substantial investment of approximately $2.5 billion outside of the United States. Moreover, potential costs could escalate by an additional $500 to $625 million due to exposure to steel tariffs and trade levies involving the European Union and Mexico. InvestingPro data reveals the company is already operating with a significant debt burden of $42.6 billion and a concerning debt-to-equity ratio of 1.62.
The analysts also pointed to the yet-to-be-finalized network upgrades required by the PJM Interconnection, which have already seen a cost increase of $600 million in Dominion's last revision. These growing project costs are viewed as inconsistent with the characteristics typically sought by investors in the utility sector, which is often considered a safety trade due to its stability and predictable earnings.
The balance sheet of Dominion Resources, which relies on regular external equity funding and maintains a high near-term dividend payout of 5.25%, could be negatively impacted by these project risks. While the company has maintained dividend payments for 43 consecutive years, InvestingPro data shows it is quickly burning through cash with negative free cash flow yield. JPMorgan's analysts expressed concern that these factors could lead to unfavorable optics in quarterly updates until the CVOW project is completed. Each report could potentially reveal higher costs for CVOW and incremental financial burdens for shareholders. For detailed analysis and 8 additional ProTips about Dominion Resources, investors can access the comprehensive Pro Research Report available on InvestingPro.
The analysts' statement underscored the unpredictability and uncontrollable nature of the external factors affecting the project. These issues could pose significant challenges for Dominion Resources, particularly in the context of the company's financial strategy and investor expectations.
In other recent news, Dominion Energy reported its fourth-quarter 2024 earnings, revealing a slight miss on earnings per share (EPS) expectations. The company posted an EPS of $0.58, below the forecasted $0.62, and revenue of $3.4 billion, which fell short of the anticipated $3.86 billion. Additionally, Dominion Energy has proposed rate adjustments to the Virginia State Corporation Commission to address inflationary pressures, including a base rate hike and a new rate class for high energy users. In financial developments, the company issued $1.5 billion in senior notes, a move facilitated by several financial institutions, potentially to manage its capital structure or finance operations. Dominion Energy also set up an at-the-market equity program, aiming to raise up to $1.2 billion through the sale of common stock, providing flexibility in capital raising. These recent developments reflect Dominion Energy's ongoing efforts to navigate financial challenges and invest in infrastructure.
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