Utility stocks’ fourth-quarter results have started come in, with 29.6% of the utility S&P 500 members having reported results already. The present scenario indicates negative earnings growth for this mature Zacks Utility Sector in the fourth quarter of 2018, with a 7.7% year-over-year decline on a 2.4% fall in revenues. This fourth-quarter scenario might change as a major chunk of utilities are yet to come up with their earnings results. As of now, 2018 utility earnings are expected to improve 12.3% year over year. For more details, refer to our latest Earnings Trends.
Rising interest rates continue to be a concern for the capital-intensive utility stocks. Interest rate hikes increase utilities' cost of capital, impacting margins and compromising on their ability to pay out or hike dividends. In addition, utilities also need to adhere to stringent environmental regulations and withstand challenges from hurricanes and storms.
Fortunes of domestic-focused regulated utilities do not change with the vagaries of the economy. Non-availability of replacement of services provided by utilities is the biggest driving force. Mature utilities gain from the introduction of new technology to maintain their transmission and distribution lines, introduction of smart meters in their service territories, and regular measures to improve the resilience of services.
The new rates in service territories, customer growth, effective management, control of expenses will have a positive impact on the earnings of utilities. The players are focused on producing more electricity from renewable sources and battery storage projects during adverse situations. The EIA projects utility scale battery storage capacity to increase by 34 GW during 2020-2050 due to continued decline in battery storage costs.
Furthermore, the unemployment rate in the United States during the end of fourth quarter was at an impressive 3.9%. This low level of unemployment boosted demand for new housing units and in turn the requirement for utility services.
How Q4 Earnings is Shaping Up
As of Feb 13, 357 S&P 500 members released fourth-quarter results. Total earnings for these companies are up 13.4% from the same period last year on 7.3% higher revenues, with 67.2% beating EPS estimates and 62.5% beating revenue estimates.
Most of the Zacks sectors (12 out of 16) are expected to perform well in the fourth quarter of 2018, with overall S&P 500 earnings expected to be up 13.6% from the same period last year on 6.2% higher revenues.
Ways to Pick Winners in the Utility Space
Choosing the right stock for one’s portfolio from too many participants is certainly a tough job. An easy way to streamline the list is by selecting stocks with a positive Earnings ESP and a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which will help in surpassing estimates.
Per our proprietary methodology, Earnings ESP is a determining factor for zeroing in on stocks with maximum chance of beating on earnings in the next announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Please check our Earnings ESP Filter that enables you to come across stocks with the potential to outshine earnings estimates this reporting cycle.
Our research shows that stocks with the perfect combination of the two key ingredients have 70% chances of a positive earnings surprise.
For investors seeking to apply this proven model to their portfolio, we have highlighted four Utility stocks that beat on earnings in the upcoming releases.
Our Utility Picks
The Southern Company SO has an Earnings ESP of +22.29% and a Zacks Rank #2. The company’s earnings topped estimates in the last four reported quarters, the average positive surprise being 9.53%. The company is slated to release earnings on Feb 20, before market open. You can see the complete list of today’s Zacks #1 Rank stocks here.
Southern Company (The) Price and EPS Surprise
Southern Company (The) Price and EPS Surprise | Southern Company (The) Quote
Alliant Energy Corporation LNT has an Earnings ESP of +1.41% and a Zacks Rank #2. The company’s earnings topped estimates in the last quarter, with a positive surprise of 1.1%. The company is slated to release earnings on Feb 21, after market close.
Alliant Energy Corporation Price and EPS Surprise
Alliant Energy Corporation Price and EPS Surprise | Alliant Energy Corporation Quote
Pinnacle West Capital Corp. PNW has an Earnings ESP of +4.17% and a Zacks Rank #2. The company’s earnings topped estimates in three out of last four quarters, with an average positive surprise of 6.15%. The company is slated to release earnings on Feb 22, before the market opens.
Pinnacle West Capital Corporation Price and EPS Surprise
Pinnacle West Capital Corporation Price and EPS Surprise | Pinnacle West Capital Corporation Quote
Sempra Energy SRE has an Earnings ESP of +2.39% and a Zacks Rank #2. The company’s earnings topped estimates in three out of last four quarters, with an average positive surprise of 4.997%. The company is slated to release earnings on Feb 26, before market open.
Sempra Energy Price and EPS Surprise
Sempra Energy Price and EPS Surprise | Sempra Energy Quote
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?
From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.
This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.
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