Wells Fargo analysts upgraded Hawaiian Electric Industries (NYSE:HE) Electric Industries (HE) to Equal Weight from Underweight on Friday, citing the increased risks associated with a potential wildfire settlement.
The decision comes as HE shares have dropped by approximately 20% from Wells Fargo's probability-weighted price target of $14 per share, prompting the analysts to move to the sidelines.
Wells Fargo highlighted several factors driving the upgrade. First, "tentative settlement details disclosed HE’s share is higher than initial reports," which has contributed to the stock's decline.
Additionally, the company's second-quarter $1.71 billion charge triggered concerns about its ability to continue as a going concern. This, combined with a recent court order allowing the tentative settlement to move forward, has left the future of HE shares uncertain.
The analysts noted that while a settlement is likely, the paths forward suggest a "wide range of values for HE shares." Although there is potential for significant upside if a settlement is finalized, Wells Fargo expressed concerns about the limited visibility and the lingering bankruptcy risk, especially given the implications of the substantial Q2 charge.
The note also mentioned that insurers involved in the settlement might be willing to settle for $1.0-1.2 billion, compared to the initial $600 million offered.
Factors that could lead to a finalized settlement are said to include insurance providers accepting less, lower-than-expected lawyer fees, or defendants, including HE, contributing more to the settlement.
Given the high degree of risk and uncertainty, Wells Fargo has chosen to adopt a more cautious stance, upgrading HE to Equal Weight while acknowledging the potential for a settlement in the coming weeks.