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4 Electric Power Stocks to Buy Amid Industry Challenges

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·8 min read
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The prospects of the Zacks Utility – Electric Power industry look better in 2022 as demand for utility services from the Commercial and Industrial (C&I) group is picking up on the vaccination drive and resumption of economic activities. Per the U.S. Energy Information Administration (EIA), 46.1 gigawatts (GW) of new utility-scale electric generating capacity will be added to the U.S. power grid in 2022. Utilities operating in the United States are taking measures to strengthen their infrastructure.

NextEra Energy NEE, with large renewable operations and well-chalked-out capital investments to strengthen infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities that are worth holding in your portfolio include Ameren Corporation AEE, OGE Energy OGE and Pinnacle West Capital Corporation PNW.


About the Industry

The Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to customers. A substantial portion of utilities’ earnings is generated from regulated operations. Unless there is any major weather variation or unprecedented incidents, such as the coronavirus pandemic, demand for the services provided by utilities remains more or less steady, regardless of economic cycles. A clear transition is evident in this industry, with more companies declaring zero-emission goals on their own. Research and development over the years have resulted in a substantial decline in the cost of setting up utility-scale renewable power projects aiding in the reduction of emissions. This is also assisting utilities in replacing coal from their generation portfolio.

3 Electric Power Industry Trends to Watch Out For

Demand for Electricity Continues to Increase: Per EIA, after declining 4% in 2020, retail sales for electricity increased by 2.1% in 2021 and are expected to improve 1.6% in 2022 and 1% in 2023. Retail sales of electricity in the commercial and industrial sectors increased by 2.8% and 2.9%, respectively, in 2021. For 2022, EIA forecasts total electricity consumption from the commercial and industrial sectors to grow 2.4% and 3.2%, respectively. The same trend is expected to continue in 2023. This is an indication of the opening up of economic activities, as there is more medical expertise and knowledge to deal with the virus. This is encouraging information for the utilities, following a sharp decline in demand in the C&I group during the pandemic period.

Transition Towards Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward the cleaner sources of energy to produce electricity. Per EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 20% in 2021 to 22% in 2022 and 24% in 2023 as a result of the continuing addition in solar and wind-generating capacity. EIA expects total solar and wind generation of 32 GW and 29 GW to be added in 2022 and 2023, respectively. The expansion of renewable energy continues to eat into the share of coal in electricity generation and EIA expects coal’s contribution to electricity generation to fall from 23% in 2021 to 22% in 2022 and 21% in 2023. The government is helping to increase the usage of renewable energy through tax credits, and operators are cutting down emissions on their own, intending to achieve carbon neutrality by 2050.

Spending on Electric Delivery Rising: Major utilities in the United States have been spending more on delivering electricity to customers and less on producing it. U.S. utilities are currently spending a substantial amount on developing an advanced electricity network. This network will utilize digital and other advanced technologies and assist in supplying electricity to end-users. The ultimate goal of the expenditure is to make the system strong, resilient and reliable. These upgrades will assist the network to perform better amid adverse weather conditions and ensure that end-users get 24x7 supply of electricity and face minimum outages.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The 59-stock Utility - Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #196, which places it in the bottom 22% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential. In a year’s time, the industry’s earnings estimates for the current year have been revised downward by 6.4% to $2.62.

Before we present a few Utility - Electric Power stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and current valuation.

Industry Lags S&P 500 But Outperforms Sector

The Utility Electric Power industry has underperformed the Zacks S&P 500 but outperformed its own sector over the past 12 months. The industry has gained 10.9% compared with its sector’s rise of 9.3% and the Zacks S&P 500 composite’s increase of 15.7% in the same period.

Price Performance (One year)



Industry's Current Valuation

On the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) TTM, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 15.66X compared with the S&P 500’s 15.32X and the Utility sector’s 18.36X.

Industry EV/EBITDA TTM vs S&P 500 (5yrs)

Industry EV/EBITDA TTM vs Sector (5yrs)

In the past five years, the industry has traded as high as 15.66X, as low as 8.87X, with a median of 12.17X.

4 Electric Power Industry Stocks to Keep an Eye On

NextEra Energy: Juno Beach, FL-based NextEra Energy is engaged in the generation, transmission, distribution and sale of electric energy. The company expects capital deployment in excess of $60 billion in different projects in the 2019-2022 time period. These investments will be directed toward modernizing and strengthening the existing infrastructure, and generating more electricity from clean sources to lower carbon emissions. NextEra expects to reduce its carbon emission intensity by 67% within 2025 from the 2005 levels. NEE’s current dividend yield is 2.01%, which is better than the Zacks S&P 500 Composite group’s average of 1.41%.

The Zacks Consensus Estimate for NextEra Energy’s 2022 earnings has gone up by 1.8% in the past 60 days. The NEE stock has gained 12.8% over the past 12 months compared with its industry’s 10.9% rally.

NextEra Energy currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: NEE

Ameren Corporation: St. Louis, MO-based Ameren Corporation generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois. Ameren has plans to invest in the range of $17.3 billion in different projects in the 2022-2026 time period, which will support the net-zero carbon emission target of 2050. Ameren’s current dividend yield is 2.6%.

The Zacks Consensus Estimate for Ameren’s 2022 earnings has gone up by 0.5% in the past 60 days. The AEE stock has gained 15.8% over the past 12 months. Ameren currently has a Zacks Rank #2.

Price and Consensus: AEE

OGE Energy: Oklahoma City, OK-based OGE Energy Corp. provides energy and offers physical delivery and related services for both electricity and natural gas, primarily in south-central United States. OGE Energy plans to spend around $4.75 billion between 2022 and 2026, which implies an improvement of 14.7% from the prior five-year capital expenditure plan. For 2022, OGE has allocated $950 million, which includes $720 million for strengthening its transmission, distribution and grid expansion operations. OGE’s current dividend yield is 4.05%.

The Zacks Consensus Estimate for OGE Energy’s 2022 earnings has gone up by 1.9% in the past 60 days. OGE shares have gained 24% in the past 12 months. OGE Energy currently has a Zacks Rank of 2.

Price and Consensus: OGE

Pinnacle West Capital Corporation: Phoenix, AZ-based Pinnacle West Capital Corporation provides electricity services (wholesale or retail) in the state of Arizona through its subsidiaries. The company is involved in the generation, transmission and distribution of electricity from coal, nuclear, gas, oil and solar. Pinnacle West Capital plans to invest $4.7 billion during the 2022-2024 period to further strengthen its operations. Pinnacle West Capital’s current dividend yield is 4.38%.

The Zacks Consensus Estimate for Pinnacle West Capital’s 2022 earnings has gone up by 1.5% in the past 60 days. The PNW stock has gained 11.4% over the past three months. Pinnacle West Capital currently has a Zacks Rank #2.

Price and Consensus: PNW




Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

NextEra Energy, Inc. (NEE) : Free Stock Analysis Report

Ameren Corporation (AEE) : Free Stock Analysis Report

OGE Energy Corporation (OGE) : Free Stock Analysis Report

Pinnacle West Capital Corporation (PNW) : Free Stock Analysis Report

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