Shares of Edison International (EIX) are sliding after a brush fire in Southern California caused outages that left thousands of Edison customers without power. However, SunTrust analyst Ali Agha argues that the company should be able to absorb any financial liabilities and sees the selloff in the shares as an "overreaction."

SELLOFF AN OVERREACTION: Investor concerns regarding a brush fire in Southern California have caused a hit to Edison International's stock, but the company should be able to absorb any financial liabilities, SunTrust's Agha noted, adding that this is a similar response as the drop in PG&E (PCG) shares in October after a significant fire in Northern California. The analyst told investors that in the case of the fire in PG&E's service area, over 220,000 acres were destroyed and the stock declined 23%, while in the Edison case so far only 31,000 acres have been consumed by the flames. Agha also pointed out that the real estate value in Southern California is likely cheaper than the event in Northern California, which covered a large part of the wine country. Citing another California fire case involving Sempra Energy (SRE), the analyst said that the utility will likely be filing a legal challenge contending that under California law all its customers should pay for the fire damage, but he does not envision a quick resolution to the issue. While the facts are still developing in the case, and the issue could remain an overhang for a while, he believes the significant stock price drop is an overreaction. Nonetheless, the analyst lowered his price target on Edison International shares to $85 from $89, while reiterating a Buy rating on the stock.

WHAT'S NOTABLE: Earlier his peer at Citi had also commented on how the fire may impact Edison. Due to California's inverse condemnation rules, the scope of damages from the wildfire in Southern California will be relevant to Edison International, but the event is "still early days," said Citi analyst Praful Mehta. The analyst pointed out that Southern California Edison has about $1B of insurance coverage for wildfires liabilities for the period ending May 31, 2018. Mehta reiterated a Neutral rating and $87 price target on Edison International shares. According to media reports, the brush fire in Southern California spread from about 50 acres to about 31,000 acres on Tuesday, forcing residents in Santa Paula, about 65 miles northwest of downtown Los Angeles, and Ventura to flee. The fire has caused outages throughout Ventura and Santa Barbara counties, leaving more than 260,000 people without power, Southern California Edison reportedly said.

PRICE ACTION: In afternoon trading, shares of Edison International have dropped almost 11% to $71.65.