Zacks Industry Outlook Highlights: Chesapeake Utilities, DTE Energy, Sempra Energy and WGL Holdings - Press Releases
For Immediate Release
Chicago, IL – June 09, 2015 – Today, Zacks Equity Research discusses the Utilities, including Chesapeake Utilities Corp. (CPK), DTE Energy (DTE), Sempra Energy (SRE) and WGL Holdings Inc. ( WGL).
Industry: Utilities
Link: https://www.zacks.com/commentary/47702/utility-industry-stock-outlook---june-2015
The Big Picture
Utilities play an important role in the economic system of any nation. They are also among the safest investment bets given the regulated nature of their business that gives their revenues a high level of certainty. They also benefit from the domestic orientation of their business, which shields them from the foreign currency translation issues that have been an issue for many other industries lately.
Though demand for utility services like electricity, gas and water varies with the swings of the economy, the business fortunes for these companies don’t vary to the same extent with the economy’s cycles. After all, these companies providing basic services can never go out of business -- this is their most basic fundamental strength. Their ability to pay consistent dividends makes them even more attractive.
To provide an uninterrupted supply of basic amenities, utilities need to upgrade and strengthen their infrastructure and modernize the generation fleet. These modifications enable utilities to meet increasing demand and abide by stringent environmental regulations laid out by state and federal agencies.
The Environmental Challenge
Utilities have long depended heavily on coal for generating a big part of their power, which has become a big challenge for the group in these times of enhanced environmental awareness. Celebrations of Earth Day and World Environment Day bring more focus on this issue but curbing pollution is an ongoing process. Utilities are installing smart meters, attaching scrubbers to lower emissions and launching energy efficiency programs to lower customers’ energy consumption.
Governments across the world are enforcing ever stricter rules and mandates to bring down the industry’s carbon footprint. In the U.S., the Environment Protection Agency’s Clean Power Plan aims to lower carbon emission from power plants by 30% by 2030 from 2005 levels.
Infrastructure investments need a huge amount of money, which makes the sector very capital intensive. Utilities generate funds from operations which help them to some extent to meet their capital requirements. However, they mostly have to depend on external sources of financing to carry out their generation, distribution and transmission projects.
Utilities have hitherto benefited from rock bottom interest rates. In addition, the ongoing improvement in the U.S. economy has led to more jobs and higher housing unit completion, which in turn is driving utility demand.
Per the U.S. Bureau of Labor Statistics, the unemployment rate in May was up marginally to 5.5% from the 5.4% recorded in April. Average hourly earnings witnessed a 2.3% rise from the year-ago figure. Also, the U.S. GDP is expected to improve by nearly 2% in the second quarter after contracting 0.7% in the first.
Taking into consideration the above positive movements and encouraging data, Fed officials might decide in favor of increasing the short-term interest rate sooner than earlier expected. In any case, the rate hike is definitely expected this year and industry experts are expecting a hike in rates from September this year.
On the other hand, a recovering U.S. economy with more jobs in the offing will drive customer growth across all classes, be it residential, industrial or commercial. A recent projection from the U.S. Energy Information Administration (EIA) indicates that total electricity use will increase by an average of 0.8% per year, from 3,836 billion kilowatt hours (kWh) in 2013 to 4,797 billion kWh in 2040.
Zacks Industry Rank - Neutral
Within the Zacks Industry classification, utilities are a standalone sector, one of 16 Zacks sectors. The rural wire-line telephone companies are also grouped within the Zacks Utility sector, but the three major industries within this sector include Electric Power, Gas Distribution and Water Supply.
We rank all of the 258 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available in the Zacks Industry Rank.
The way to look at the complete list of Zacks Industry Rank for the 258+ industries is that the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,’ between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.’
After scanning the utility sector, we find three prominent industries under it in the first two categories. Gas Distribution has a Zacks Industry Rank #98, Electric Power has a Zacks Industry Rank #98 and Water Supply has a Zacks Industry Rank #116.
Overall, our present outlook on this industry is Neutral.
Earnings Result and Expectations
The year-over-year earnings growth from the utility sector in the first quarter of 2015 was 8.4%, way ahead of the S&P 500 growth of 2.4%. Second-quarter earnings growth expectation from this sector is 3.1% as compared to a contraction of 7% expected from the S&P 500 group.
Investors can consider adding the following utilities to their portfolio. They’ve been performing well on a consistent basis.
Chesapeake Utilities Corp. (CPK), a Zacks Rank #1 (Strong Buy) stock, has pulled positive earnings surprises in three of the last four quarters with an average beat of 5.37%. This company delivered a positive earnings surprise of 30.91% in the first quarter.
Zacks Ranked #2 (Buy) DTE Energy (DTE) has pulled earnings surprises in two of the last four quarters with an average beat of 2.49%. This company has a long-term earnings projection of 5.05%. The first-quarter earnings beat was 10.74%.
Sempra Energy (SRE) carrying a Zacks Rank #2 has posted earnings surprises in three of the last four quarters with an average beat of 11.32%. This company has a long-term earnings projection of 8.48% and its first-quarter earnings beat was 22.14%.
WGL Holdings Inc. (WGL) also holds a Zacks Rank #2 and has an unblemished record of earnings beats in the last four quarters with an average of 44.04%. In the first quarter, the company delivered a positive earnings surprise of 29.49%. Its long-term earnings projection is 6%.
Earnings growth from the utility space is expected to be 4.2% in 2015 compared with 1% from the S&P 500.
For more information about earnings for this sector and others, please read our ' Earnings Trends ' report.
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CHESAPEAKE UTIL (CPK): Free Stock Analysis Report
DTE ENERGY CO (DTE): Free Stock Analysis Report
SEMPRA ENERGY (SRE): Free Stock Analysis Report
WGL HLDGS INC (WGL): Free Stock Analysis Report
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