The Southern Co.: Safety and decent growth are hard to ignore

Posted Jun 19th 2009 2:00PM by Joseph Lazzaro
Filed under: Stocks to Buy, Southern Company (SO)

Readers of this space know that one of the preferred sectors is the electric/power generation sector, which should benefit from both an expanded infrastructure and ramping demand, once U.S. economic growth resumes.

And with the above in mind, the Southern Co. is (NYSE: SO) worth a review. The Southern Co. provides power to roughly 4.3 million customers in the Southeast United States.

In general, analysts expect the economic recovery in and around Atlanta, Georgia, SO's core area, to put a bottom under earnings in FY2009. The commercial side of energy use (primarily the industrial segment), will take longer to snap-back, but a more-modest decline in the residential sector and its quicker recovery should offset that industrial sluggishness. The greater Atlanta region did not experience as large a housing bubble as the West and East, hence the bust was not as severe, from a household formation standpoint.

Analysts are also impressed by SO's dividend stream, experienced management, 42.6 megawatts of generating capacity, and the predictability of operations in a steady-habits region of the United States. The First Call FY2009/FY2010 EPS estimates for SO are $2.39 to $2.52.

Other positives: Technically, Southern's shares have held a retest of a low at $26.50 and now have good, double-bottom support at that level. The P/E of 16 is not low, but given the company's stability and the attractive mix of safety, good dividend, and decent prospects for growth, the scale is tipped well toward a Buy.

Stock Analysis: Southern Co. is a moderate-risk stock. Consider buying a 25% position in SO now; then buy another 25% in four months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your SO position before October 2009. Sell/stop loss if you were to buy shares in this company: $17.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: energy, SO, Soutthern Co.