4 Stocks to Buy From the Promising Electric Power Industry
Zacks Utility – Electric Power industry stocks have been transitioning toward clean sources of fuel and focusing on lower carbon emissions. The introduction of the Inflation Reduction Act 2022 will support the industry’s transition toward clean energy sources to produce electricity. Utilities are also focused on strengthening the grid as well as transmission and distribution infrastructure. The huge infrastructure of the utilities faces the impact of the hurricane season each year. Infrastructure enhancement around the year increases the resilience of the entire system, reduces outages and allows operators to restore power quickly for customers affected by storms.
The Southern Company SO, with its expanding clean power generation portfolio and expanding customer base, renewable operations and well-chalked-out capital investments to strengthen infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities worth adding to your portfolio are PG& E Corporation PCG, Vistra Corp. VST and Pinnacle West Capital Corporation PNW.
About the Industry
The Utility – Electric Power industry involves the 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, demand for the services provided by utilities remains steady, regardless of economic cycles. Per an EIA report, high temperatures during the third quarter are likely to have increased generation by 2% year over year. A clear transition is evident in this industry, with more companies declaring zero-emission goals. 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 reducing emissions. However, the ongoing increase in interest rates is a concern for capital-intensive utilities.
3 Electric Power Industry Trends to Watch Out For
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward cleaner sources of energy. Per the U.S. Energy Information Administration (EIA), the annual share of U.S. electricity generation from renewable energy sources will rise from 22% in 2022 to 25% in 2024, as a result of the continuing addition of solar and wind-generating capacity. The passage of the Inflation Reduction Act (IRA) will support and accelerate the utilities’ transition toward clean energy sources. IRA has removed the uncertainties relating to federal incentives provided for renewable sources usage. The act entails an opportunity for a wide range of low-cost clean energy solutions in a predictable way for a long time and will create earnings visibility. Courtesy of IRA, the utility operators are planning to add more renewable assets to their generation portfolio and shut down old polluting units.
Demand for Electricity Stable: Per EIA, electricity demand in the United States can drop 1.3% year over year in 2023 but increase 1.7% in 2024. The drop in demand in 2023 was primarily due to milder temperatures in the first half of the year. Despite the expected drop in usage, utilities will continue to benefit from the rise in residential electricity rates. EIA forecasts the average price of electricity to U.S. residential customers to increase by 4% in 2023 to 15.7 cents/kWh.
Ongoing Interest Rate Increase is a Concern: Utilities, in order to maintain, upgrade and expand operations, approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. But multiple rate hikes in 2022 pushed up interest rates. The Federal Reserve decided not to increase interest rate in its September meeting. The benchmark rate is high, in the 5.25-5.50% range, after a 25 bps hike in July. Fed officials are contemplating increasing rates once more in 2023. The increasing interest rates are a concern for capital-intensive utilities in the United States as these will push up capital servicing costs substantially from the current levels. Utilities might try to pass on the burden of increasing borrowing costs to customers but the necessary increase in rates might not be approved by the commission. In such a scenario, utilities will need to digest the extra expenses, which can lower their profitability and make them less attractive to investors interested in the utility space.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. The 55-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #25, which places it in the top 10% of more than 251 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential.
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 and Sector
The Utility Electric Power industry has lagged the Zacks S&P 500 and its own sector over the past 12 months. The industry has declined 12.6% compared with its sector’s decrease of 10.5%. The Zacks S&P 500 composite has gained 17.5% 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 15.96X compared with the S&P 500’s 12.72X and the Utility sector’s 16.19X.
Over the past five years, the industry has traded as high as 20.55X, as low as 10.42X and at the median of 13.60X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs)
Industry EV/EBITDA TTM vs Sector (5yrs)
4 Electric Power Industry Stocks to Focus On
Vistra Corp.: Irving, TX based Vistra, along with its subsidiaries, operates as an integrated retail electricity and power generation company. Vistra has been making systematic capital expenditures to boost its portfolio. It plans to invest $1,722 million in 2023 to further strengthen its operations. The company is aiming to achieve net-zero emissions by 2050. It currently has 3,750 megawatts (MW) of zero-carbon generation online. VST’s current dividend yield is 2.63%. The Zacks Consensus Estimate for Vistra Corp.’s 2023 and 2024 earnings implies year-over-year growth of 220.41% and 23.87%, respectively. Vistra currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: VST
The Southern Company: Atlanta, GA-based The Southern Company, along with its subsidiaries, is engaged in the generation, transmission and distribution of electricity. The company also supplies natural gas to its customers. The company expects capital deployment in excess of $80 billion in different projects from 2023-2027. SO’s long-term (three to five years) earnings growth is pegged at 4%. The current dividend yield for SO is 4.33%, better than the Zacks S&P 500 Composite group’s average of 1.77%. The Zacks Consensus Estimate for Southern Company’s 2023 earnings is unchanged year over year, while 2024 estimates imply year-over-year growth of 11.46%. The Southern Company currently has a Zacks Rank #2 (Buy).
Price and Consensus: SO
PG&E Corporation: San Francisco, CA-based PG&E Corporation generates revenues mainly through the sale and delivery of electricity and natural gas to customers. The company planned capital expenditures in the range of $40.2-$64.3 billion for 2023-2027 time period. Such solid capital expenditures on infrastructure bode well for the long haul. PCG’s long-term earnings growth rate is pegged at 2.51% The Zacks Consensus Estimate for PCG’s 2023 and 2024 earnings per share implies a year-over-year increase of 10% and 11.7%, respectively. PCG currently has a Zacks Rank #2.
Price and Consensus: PCG
Pinnacle West Capital Corporation: Phoenix, AZ-based Pinnacle West Capital provides electricity services (wholesale or retail) in Arizona through its subsidiaries. The company has a capital plan of $5.32 billion for the 2023-2025 period. The ongoing investment and planned future investment will assist the company to make its systems clean, make its services affordable, reliable and developing innovative programs to assist its customers. PNW’s current dividend yield is 4.82%. PNW’s long-term earnings growth is pegged at 6.46%. The Zacks Consensus Estimate for PNW’s 2023 and 2024 earnings per share has moved up by 1.21% and 0.6%, respectively, in the past 60 days. Pinnacle West Capital currently has a Zacks Rank #2.
Price and Consensus: PNW
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Southern Company (The) (SO) : Free Stock Analysis Report
Pacific Gas & Electric Co. (PCG) : Free Stock Analysis Report
Pinnacle West Capital Corporation (PNW) : Free Stock Analysis Report
Vistra Corp. (VST) : Free Stock Analysis Report
