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3 Utilities Poised to Continue Stellar Run in Q4 Earnings

Zacks Equity Research

Domestic-focused capital intensive Utilities continue to perform steadily as the demand for utility services hardly fluctuates with the movements in the economy. Cost control, new electric rates and customer growth continue to help the utility sector to maintain operational stability.

Earnings of the Utilities sector are expected to improve 11.6% on 0.1% improvement in revenues (for more details refer to our weekly Earnings Trends) in 2018. Per a projection from the U.S. Energy Information Administration (“EIA”), retail prices of electricity will continue to increase at all customer segments, which is a way of boosting the utilities’ top-line growth. Per EIA release, wholesale power prices at major trading hubs in the United States in 2018 were generally higher than that of 2017, which will also provide support to utilities.

To provide uninterrupted 24x7 services to customers, the utilities are required to upgrade, maintain and replace older wires, electric poles, as well as power stations. Hence, apart from internal sources of funds, utilities depend on the credit market for funds to carry on upgrades.

In a way, low interest rates allow the utilities to continue with their long-term capital investment plans by borrowing funds from the market. However, the ongoing revision in rate hikes will continue to pose difficulties for the capital-intensive utility stocks. The utilities, after repayment of cost of capital, might find it difficult to reward their shareholders.

The Federal Reserve, after increasing the interest rates for four times in 2018, reduced rate hike possibilities to two from earlier expectation of three in 2019. The cautious approach of the Fed takes into consideration the lower-than-expected development in global economy, uncertainty surrounding the U.S.-China trade dispute and impact on the global economy post U.K.’s exit from European Union, which is indeed good news for the utility space.

Likely Q4 Outperformers

With the help of our Zacks Stock Screener, we have identified a few stocks that are poised to beat the Zacks Consensus Estimate in the fourth quarter. These stocks have the ideal combination of two ingredients — a positive Earnings ESP and a favorable Zacks Rank — and hence, are likely to surpass expectations. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The performance of the stocks in the Utility Electric Power industry was better than the Zacks S&P 500 Composite over the past three months. The dividend yield of these stocks was better than the Zacks S&P 500 Composite’s 2%.

Price Performance

CMS Energy Corporation CMS, along with its subsidiaries, supplies electricity and natural gas to customers in Michigan. The company plans to invest $10.1 billion on infrastructure upgrades and replacements, as well as electric supply projects from 2018 through 2022. The positives for the utility are given below:

Zacks Rank #2 (Buy)
Earnings ESP: +0.82%
Average four-quarter positive surprise: 6.37%
Long-term earnings (three to five years) growth: 6.18%
Estimates for 2019 have been revised 0.9% upward over the past 30 days.
Dividend Yield: 2.88%

Dominion Energy Inc. D, together with its subsidiaries, produces and transports energy in the United States. The positive aspects of the utility are:

Zacks Rank #2
Earnings ESP: +1.07%
Average four-quarter positive surprise: 6.99%
Long-term earnings growth: 6.61%
Estimates for 2019 have been revised 0.94% upward over the past 30 days.
Dividend Yield: 4.78%

Eversource Energy ES engages in the energy delivery business. It transmits and delivers electricity and natural gas to more than 3.7 million residential, commercial and industrial customers in Connecticut, New Hampshire and Massachusetts. The company has plans to invest $7.1 billion in the 2019-2021 time period to further strengthen existing operations. The positives for the utility are as follows:

Zacks Rank #2
Earnings ESP: +0.89%
Average four-quarter positive surprise: 1.42%
Long-term earnings growth: 5.91%
Estimates for 2019 have been revised 0.3% upward over the past 30 days.
Dividend Yield: 3.06%

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