The near-term prospects of the Zacks Utility – Electric Power industry stocks have been adversely impacted by the outbreak of the novel coronavirus, which lowered demand for electricity. A very active hurricane season also disrupted the normal operations of the utilities. However, utilities are consistently working toward increasing operational resilience, lowering expenses and investing in a consistent manner to boost infrastructure and offer services more efficiently. Improving electric rates are also assisting the utilities to efficiently carry on their long-term capital projects. The prevailing near-zero level interest rates is helping in generating necessary funds for capital projects.
The outbreak of novel coronavirus has resulted in unprecedented economic crisis with millions losing their jobs. Most of the utilities operating in the United States ensured 24X7 supply of electricity, water and natural gas to customers even if they failed to pay their utility bills and provided relaxation to those in financial distress. The possibility of a vaccine and easing of restrictions are expected to boost demand for electricity from all customer classes and NextEra Energy (NEE), with large renewable operations, offers an excellent opportunity to stay invested in the utility space. Other utilities that are worth holding in your portfolio include Dominion Energy (D), Duke Energy Corporation (DUK) and Xcel Energy (XEL).
About the Industry
The Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to residential, commercial and industrial customers. A substantial portion of utilities’ earnings is generated from regulated operations while other portions come from competitive markets. Unless there is any major weather variation or unprecedented incidents, such as the ongoing coronavirus pandemic, demand for the services provided by utilities remains more or less steady, regardless of economic cycles.
Widely available coal once used to be the key source of electricity in the United States. However, courtesy of the shale gas revolution and conscious efforts toward generating more electricity from clean sources, natural gas gradually replaced coal. Natural gas’ clean burning nature, vast availability and low prices work in its favor. In addition, a decline in the cost of setting up utility scale power projects based on renewable energy sources is helping utilities to replace coal from their generation portfolio.
Let's take a look at the industry’s three major themes:
Declining Demand Due to Coronavirus: The U.S. Energy Information Administration (EIA) forecasts a 2.2% reduction of electricity consumption in the United States this year compared with the 2019 level. This can be attributed primarily to a decline in demand from the commercial and industrial (C&I) customer group due to the coronavirus-led lockdowns. Demand from commercial and industrial customers are expected to slump 6.2% and 5.6%, respectively, from the 2019 levels.However, per EIA, demand from residential customers is expected to jump 3.2% in 2020 and offset some of the decline from the C&I cohort. Residential demand is likely to improve on the back of increased summer cooling requirement with more people working from home.
Move Toward Cleaner Sources to Generate Power: A gradual and definite transition in the U.S. utility space in quite evident with more operators voluntarily announcing long-term plans to go carbon neutral or substantially lower emission from the historical levels. EIA forecasts renewable sources to contribute 20% of the U.S. electricity production in 2020, up from 17% in 2019, 21% in 2021. The share of natural gas will be 39% in 2020, up from 37% in 2019. Both renewable energy and natural gas continue to eat into the share of coal in electricity generation, which is expected to average 20% in 2020, down from 24% in 2019.
Development of Battery Storage to Support Renewables: EIA forecasts renewable energy to be the fastest-growing source of electricity generation in 2020 and beyond. Research and development have significantly reduced cost of producing electricity from renewable sources. Also, the expected increase in fossil fuel costs over the long run should make clean renewable sources more attractive. However, a major drawback of clean renewable sources is its inability to produce 24x7 power like fossil fuel-based electricity plants due to natural causes. To overcome this problem, large battery storage is being developed across the United States to support the renewable power generation units. EIA expects that with the implementation of U.S. laws and policies, large-scale battery storage capacity will grow from 1 GW in 2019 to 17 GW in 2050. The ongoing research and development will further lower the cost of installing utility-scale battery storage projects and assist in the transition toward clean energy.
Zacks Industry Rank Indicates Bleak Prospect
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 Utilities sector and currently carries a Zacks Industry Rank #176, which places it in the bottom 29% 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 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. Since Oct 31 2019, the industry’s earnings estimates for the current year have been revised downward by 13.3% to $2.58.
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, Tops Sector
The Utility Electric Power industry has outperformed its own sector but lagged the Zacks S&P 500 composite over the past 12 months.
The industry has lost 4.9% compared with its sector’s decline of 7.9% and the Zacks S&P 500 composite’s increase of 8.8% in the 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 11.39X compared with the S&P 500’s 13.66X and the Utilities sector’s 16.54X.
Industry EV/EBITDA TTM vs S&P 500
Industry EV/EBITDA TTM vs Sector
In the past five years, the industry has traded as high as 13.39X, as low as 8.05X, with a median of 10.95X.
4 Electric Power Industry Stocks to Keep a Close Watch On
NextEra Energy: Juno Beach, FL-based NextEra Energy Inc. is engaged in the generation, transmission, distribution and sale of electric energy. The company has plans to invest $50-$55 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. Its current dividend yield is 1.91%, which is better than the S&P 500 group’s average of 1.68%.
The Zacks Consensus Estimate for NextEra Energy’s 2021 earnings and revenues suggests a year-over-year rise of 9.46% and 9.47%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 1.2%. The stock has gained 30.3% over the past 12 months. NextEra Energy currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: NEE
Dominion Energy: Richmond, VA-based Dominion Energy Inc.is engaged in regulated and non-regulated electricity distribution, generation and transmission businesses. Dominion Energy plans to invest $23.9 billion in the 2020-2022 time period to strengthen its existing infrastructure. Dominion Energy aims at cutting down carbon emissions in power generation by 55% in 2030 and further by 100% in 2050 from the 2005 levels. Its current dividend yield of 4.68% is better than S&P 500 group’s average.
The Zacks Consensus Estimate for Dominion Energy’s 2021 earnings and revenues suggests a year-over-year rise of 6.77% and 2.18%, respectively. Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 0.5%. The stock has gained 1.3% over the past 12 months. Dominion Energy currently has a Zacks Rank #2 (Buy).
Price and Consensus: D
Duke Energy Corporation: Charlotte, NC-based Duke Energy has a wide portfolio of electric and natural gas and regulated and unregulated businesses which supply, deliver and process energy in North America and select international markets. The company intends to invest $42.7 billion during the 2020-2024 time period to strengthen its infrastructure and expand its renewable power generation portfolio. Its current dividend yield of 2.46% is better than S&P 500 group’s average.
The Zacks Consensus Estimate for Duke Energy’s 2021 earnings and revenues suggests a year-over-year rise of 2.81% and 3.9%, respectively. The stock has gained 2.7% over the past 12 months. Dominion Energy currently has a Zacks Rank of 3.
Price and Consensus: DUK
Xcel Energy: Minneapolis, MN-based Xcel Energy through its subsidiaries, generates, purchases, transmits, distributes and sells electricity. Xcel Energy intends to invest $24 billion during 2021-2025 in its utility assets to provide reliable services to its customers and effectively meet rising electricity demand. Its current dividend yield is 4.19%, which is better than S&P 500 average.
The Zacks Consensus Estimate for Xcel Energy’s 2021 earnings and revenues suggests a year-over-year rise of 7.41% and 6.95%, respectively. Over the past 30 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 0.3%. The stock has gained 16.6% over the past 12 months. Dominion Energy currently has a Zacks Rank of 3.
Price and Consensus: XEL
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