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or gas.That has lifted the company’s return, revenues, and growth to the top 15% of the electric utility universe.

California seems to be among the bright spots in the generation business. What about a second favorite?
Another Californian: Sempra Energy (SRE), a natural gas and electricity company based in Southern California that owns So CalGas and San Diego Gas & Electric. Like PG&E, Sempra is benefiting from strong rate base growth. Additionally, the company has set up a pretty dynamic power trading arm that we estimate adds some $3 a share in value, a plus that the stock is not currently reflecting. With 40% or 50% of its gas under contract, Sempra is shielded from any spikes in commodity prices.

What about a telecom play?
AT&T (T) continues to show good momentum in its wireless and consumer landline businesses. AT&T’s wireless segment, however, will continue to drive most of the company’s revenue growth. Meanwhile, Project Lightspeed, the company’s effort to extend its cable network to homes, seems to be hitting on all cylinders. We see AT&T generating a lot of free cash flow from its business, something that has funded its $10 billion stock buyback recently. In all, look for revenue growth of 7% per year over the next five years compared with 4% for AT&T’s peers.

Sterling’s Picks

52-week price range
Company (Ticker) Price Low High 2007Est. EPS 200 7P/E Ratio Comment
AT&T (T) $38.73 $31 $42 $2.76 14.0 As the network provider for Apple’s iPhone, the $236 billion telecom’s wireless revenues should continue to grow.
PG&E (PCG) $43.97 $41 $52 $2.79 15.8 The $16 billion San Francisco firm may grow earnings by 8% a year over the next five years.
SEMPRA ENERGY (SRE) $54.51 $49 $66 $3.93 13.9 Based in San Diego, the $14 billion company has benefited from a solid base of incremental price increases.

data as of 9/7/07 Source: Yahoo! Finance


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