While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Southern Co. (SO 0.69%) slipped this morning after Wells Fargo downgraded the electricity provider from outperform to market perform.
So what: Along with the downgrade, analyst Neil Kalton lowered his price target to $43-$44 (from $44-$45), representing about 5% worth of upside to yesterday's close. While contrarian investors might be attracted the stock's steep decline over the past six months, Kalton believes that Southern's risk/reward trade-off remains unattractive given its valuation relative to peers.
Now what: Wells lowered its earnings-per-share estimate for Southern to $2.67 from $2.75 in 2013, to $2.83 from $2.88 in 2014, and to $2.93 from $3.03 in 2015. "Our Market Perform rating reflects valuation considerations given a higher than historical risk profile and industry average EPS growth outlook," noted Wells. "Shares of SO trade roughly in-line with Regulated Electric peers on our new 15E EPS and we believe a roughly in-line valuation is warranted until SO's risk profile decreases and/or the EPS growth rate accelerates." Of course, with Southern shares now boasting a dividend yield of nearly 5%, investors with some patience will be getting paid nicely to wait on that growth.
