Equity Position Update: Pacific Gas & Electric Co.
As we enter our fifth year as investors in PCG (PCG, Financial), first as bondholders and then as shareholders, we remain as enthusiastic as ever about the company’s potential. Even with a 63% increase in the share price over the past six months, we believe the Company remains significantly undervalued with a risk-reward skewed almost entirely to the upside. Patti Poppe is one of the most talented CEOs in America today and we expect her team will be able to consistently deliver on their 10% medium term earnings growth forecast. In addition to improved management execution, this trajectory is significantly de-risked by supportive legislative initiatives (a 10-year undergrounding plan and extension of Diablo Canyon) and improving regulatory certainty via positive cost of capital adjustments and the 2023 General Rate Case.
By 2024, earnings should grow to at least $1.34. Using a conservative 16x multiple on forward earnings (vs. 18x for the group) implies a $21.50 target price by the end of this year. Shareholders will also benefit from an expected reinstatement of a dividend in the middle of 2023. This should serve as a catalyst for increased institutional ownership, similar to the dynamics around the Company’s inclusion in the S&P 500 Index in September 2022. Finally, investors are becoming more comfortable with the reduction in the Fire Victims’ Trust ownership stake, which now accounts for only 9% of shares outstanding. The reduction from an original position of 24% occurred with limited market impact and we expect the remainder of the position will be exited by the end of this year, clearing that overhang.
From Daniel Loeb (Trades, Portfolio)'s Third Point fourth-quarter 2022 letter.
