Entergy Worries Could Get Overdone

On Sunday, Entergy (ETR), a utility company based in New Orleans, announced that it had a fatal accident at an Arkansas nuclear plant.

Early reports indicate that this was really an industrial accident that had no nuclear aspect to it. In fact, it happened on a part of the plant grounds that is away from the nuclear generator.

Nonetheless, since the public is extremely skittish about nuclear safety, I wouldn't be surprised if the stock drops today. If it does, I'd view that as a buying opportunity. In my view, Entergy stock was already mildly attractive at Friday's closing price of $63.24. If it should fall below $60, I believe that would be an opportunity to buy.

Entergy provides electricity to 2.8 million customers in Arkansas, Louisiana, Mississippi and Texas. About 75% of its electricity is generated by nuclear power.

One of the major appeals of a utility stock is the dividend yield. These days, however, I consider the yields on most utilities to be skimpy. Energy's, however, is pleasantly rich, at 5.2%.

One of the problems with most utility stocks is a heavy debt load. Granted, it's a steady and regulated business, but I still prefer it if stockholders' equity exceeds debt. In Entergy's case, I don't get my wish: Debt is about 60% of the capital structure. That's tolerable to me, though.

The valuations on the shares are attractive in my view. As of Friday, the stock sold for about 10x earnings, 1.2x book value (corporate net worth per share) and less than 4x cash flow.

One reason the shares are cheap is that analysts foresee little earnings growth: about 1% this year and 3% next year. But analyst guesses -- excuse me, estimates -- are often imperfect snapshots, even of the near future.

The goal of investing is to buy low and sell high, so you might think analysts would like a stock more at lower prices. But one of the great paradoxes of Wall Street analysis is that the stock price and its average analysts' rating often rise and fall together.

That is the case with Entergy, which became less popular with analysts as it descended from about $97 a share in 2008 to about $63 recently. Today, only two of the 18 analysts who follow Entergy rate it a buy.

That a stock is unpopular is not sufficient reason to buy it. But it's not a bad place to start.

At the time of publication, Dorfman and his clients had no positions in Entergy.