Thursday, September 14, 2006

Calls of Note Part 5

- Couple of firms are positive on TXU Corp (NYSE:TXU):

* Goldman Sachs says they believe, for investors willing to withstand shoulder month weakness for gas prices, that the sell-off in TXU is unwarranted. Over 12% total return upside exists, even after decreasing DCF-based target price by $1 to $70 on slightly higher long-term cost assumptions. Firm continues to view TXU as one of the more attractive names in the sector given its strong near-term cash flows, attractive assets and leverage to commodity prices.

Upcoming catalysts over the next 3-6 months include 1) the announcement of a new share repurchase plan, as they forecast approximately $1.4 bn in buybacks for 2007/2008, 2) potential sales of equity stakes in TXU DevCo, thereby decreasing equity at risk in the proposed new generating plants, 3) strong 3Q2006 results following strong summer demand, 4) updates on hedging and 5) the resolution of permitting issues for the first new coal units.

* Wachovia notes TXU shares have fallen over 4% in the past week (vs. 1.3% gain for S&P 500) on tumbling natural gas prices, compounded in their view by resurgent concerns on the TX coal plant initiative, recent headlines about potential carbon legislation, possible credit rating pressure, and profit taking absent near term catalysts. Shares were trading at or near all time high levels when the firm initiated coverage with an Outperform rating earlier this month. In ther view, near term upside potential into the $70--$75 area can be driven by sustained strong margins in retail and power, lower than expected customer turnover, and potentially catalyzing events e.g. separating the utility and/or progress on the TX and PJM coal initiatives.

TXU trades at a discount to Exelon (on a P/E basis) and its IPP peers (on a P/E and EV/EBITDA basis), despite its margins being in firm's view well protected and the existence of several positive potential catalysts vs. overhangs (e.g. a stalled merger) in the case of EXC. Poor sentiment and a lack of near-term catalysts could sustain near term weakness, but it seems overdone and they'd add in the low $60's.

Notablecalls: Would not hold below $63.

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