On Thursday, BMO Capital adjusted its stance on Hydro One Ltd. (H:CN) (OTC: HRNNF) stock, moving the rating from Outperform to Market Perform, while maintaining a price target of C$42.00. The change reflects the company's strong performance, but also a valuation that exceeds historical averages.
Hydro One, known for its transmission and distribution (T&D) growth in Ontario, reported a 10% year-over-year increase for the second quarter of 2024. The firm's regulated assets, solid balance sheet, clear capital expenditure program, and stable management team were all noted as positive factors contributing to the company's robust performance.
Despite this growth, the firm's stock has significantly outperformed the S&P/TSX Utilities Index, with increases of approximately 17%, 54%, and 77% over the past 1, 3, and 5 years, respectively. This exceptional performance has led to a premium price-to-earnings (P/E) valuation of 21 times, which is above the historical range of 17 to 21 times and higher than the 14 to 17.5 times P/E valuation of its peers.
The analyst pointed out that while the downside risk to consensus estimates is limited, the stock's significant outperformance and premium valuation have influenced the decision to adjust the rating. The target price remains unchanged, suggesting that the anticipated return relative to the target does not justify the higher Outperform rating any longer.
Hydro One's financial health and growth prospects appear to be sound, yet the market positioning and valuation metrics have prompted a more cautious outlook from BMO Capital. The new Market Perform rating suggests that the analyst believes the stock may now perform in line with the broader market.
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