PG&E Is Worth Buying Despite Lawsuits

PG&E Is Worth Buying Despite Lawsuits

Despite a drastically tarnished reputation, PG&E Corp (NYSE: PCG) intends to raise capital of around $2 billion by issuing shares, though the current fad within the investing public is to support companies that abide by the laws governing environmental protection, which unfortunately PG&E failed to do. A pipe explosion in 2010 caused deaths in the area along with the damage to the environment that resulted in a state regulated penalty of $2.25 billion.

How will lawsuits and penalties affect goodwill and reputation?
With the protests by the families of those killed or injured, people will tend to show their support to those who have suffered. However, many would see it as a chance to buy more shares, and with a $70 million contribution to the city of San Bruno, PG&E might have cooled down those who view it as an act of "making up."

PG&E recovered from the San Francisco 1906 earthquake in only three years, which shows that it used to be able to handle problems, but the majority of the management of those times might have passed away by now (this is 2013)! Now who and what will save PG&E?

How issuance of shares can affect PG&E
Earnings per share has declined by 0.31% since 2010 and with another issue on the move, it is heading for an even lower figure. The proposed penalties are four times its operating profit, and shareholders should invest in the company only if it is looking forward to further capital investment in infrastructure, improvement, and retention or newer projects. In fact, one such proposition lies pending with the CPUC. Also, the company is working on power subsidy to sell at a lower cost to the Californian county.

PG&E filed bankruptcy for its utility unit in 2001. With fines as high as this, it is looking for another bankruptcy filing unless it succeeds in raising the capital. It would be till the end of 2013 when PG&E finally know where they are headed. Until then, it is expected to incur unpredictable costs for the incident's after-effects. Still, oil and gas companies are solid investments for people who are looking for definitive returns, and PG&E projects $1.71 to $2.27 EPS despite the problems. Its current market cap stands at 18.48 billion and the current P/E ratio is 19.76 which would grow after issuance of shares. However, P/E must never be looked at in isolation.

What now?
There are other companies like UniSource Energy (NYSE: UNS)with a quarterly dividend yield of 3.73% and an EPS of $2.48 with a market cap of $1.94 billion and a P/E ratio of 19.56. Still, in comparison to the investors' ratios of PG&E we could say that UniSource would find it pretty hard to deal with problem like PG&E. Abiding by laws and regulations will make PG&E more appealing to investors since they would like to stick with a company that is fulfilling its social responsibility, than be owners of a company that is disliked for its disregard of the environment, the people, and regulations.

ITC Holdings (NYSE: ITC)has a dividend yield of 1.67% and an EPS of $3.75. Its market cap stands at 4.69 billion and ITC has a lot of room for expansion and if it moves in that direction, it should be an appealing place for investors with a current P/E ratio of 23.83, which is likely to increase as investors see more expansion and share price increases. The signal given by a high P/E is that of higher future gains, and this can be perceived as a lucrative opportunity for investors who want to buy shares. Still, it must not be looked at in isolation especially if it has been calculated using future earnings. Muir, the Equity Analyst at S&P Capital IQ says that the company is looking forward to take its dividend as well as EPS into double figures.

One more thing to be considered is the leverage or gearing of this company. The liability figure has already increased by 8.42% by end of Q2 of 2013 from the start of Q1. Higher gearing means that there will be less assets for shareholders after all liabilities have been paid off.

PG&E has the history of recovering from environmental damage lawsuits like The Erin Brockovich Pacific Gas & Electric Case, where the tort settlement was $333 million - still it would take more than history to appeal investors like the EPS projection and capital investment proposal pending with the CPUC. Abiding by safety acts in the future will offer better prospects to PG&E and good investment opportunity to investors.

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RK Goel has no position in any stocks mentioned. The Motley Fool recommends ITC and UniSource Energy.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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