While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of utility company Exelon (EXC 0.56%) rallied 2% this morning after its $6.8 billion purchase of power distributor Pepco Holdings (NYSE: POM) prompted an underperform-to-market perform upgrade from Wells Fargo.
So what: Along with the upgrade, analyst Neil Kalton boosted his price target to $36-$37 (from $26-$27), representing about 6% worth of upside to yesterday's close. So while contrarian traders might be turned off by Exelon's price surge in 2014, Kalton's call could reflect a sense on Wall Street that recent developments give the stock more room to run.
Now what: According to Wells, Exelon's risk/reward trade-off is pretty balanced at this point. "We are increasing our 2015-17E EPS to/from $2.60/$2.30, $2.80/$2.15 and $3.00/$2.10 to reflect (1) materially higher power prices since our estimates were last updated and (2) projected accretion from the POM acquisition in 2016 and 2017 that is consistent with EXC's guidance," said Kalton. "While we view the POM acquisition as a modest positive, our change in thesis is primarily driven by continued momentum in the power markets." When you couple Exelon's newly bolstered scale with its still-solid 3%-plus dividend yield, it's tough to disagree with Wells' upgrade.
