Utility stocks have crossed the halfway mark of first-quarter earnings season. The current scenario indicates year-over-year earnings growth of 1.5% for this mature Zacks Utility Sector in first-quarter 2019, riding on 1.2% growth in revenues. For more details, refer to our latest Earnings Preview.
Non-availability of replacement of services provided by utilities is the biggest driving force behind the growth of this sector. Mature utilities gain from the launch 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. Utility earnings in the first quarter benefited from colder-than-normal temperatures in the United States, which in turn boosted demand and earnings.
The new rates in service territories, customer growth, effective management and control of expenses will have a positive impact on earnings of utilities. The players are focused on producing more electricity from renewable sources and battery storage projects amid adverse situations. Courtesy of the initiatives, the U.S. Energy Information Administration (“EIA”) forecasts that U.S. energy-related carbon dioxide (CO2) emissions will decline 1.6% year over year in 2019.
Interest rates continue to be a concern for capital-intensive utility stocks. Interest rate hikes increase utilities' cost of capital, thereby impacting margins and compromising on their ability to pay out or hike dividends. In addition, utilities need to adhere to stringent environmental regulations, and withstand challenges from hurricanes and storms.
Unemployment rate in the United States during the end of first-quarter 2019 was at an impressive 3.8%. This low level of unemployment boosted the demand for new housing units and in turn the requirement for utility services from the residential sector.
How Q1 Earnings Are Shaping Up
As of May 3, 77% of S&P 500 members released first-quarter results. Total earnings of these companies are up 15.2% from the same period last year on 6.4% higher revenues.
Most of the Zacks sectors (10 out of 16) are expected to perform well in first-quarter 2019, with overall S&P 500 earnings likely to be up 0.1% from the same period last year on 4.6% 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), a combination that makes us confident of a positive surprise.
Per our proprietary methodology, Earnings ESP is a determining factor for zeroing in on stocks with maximum chance of beating on earnings. 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 having 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 are likely to beat on earnings in the upcoming releases.
Our Utility Picks
Southwest Gas Corporation SWX has an Earnings ESP of +1.48% and a Zacks Rank #2. The company’s average positive surprise in the last four quarters is 27.2%. It is slated to release quarterly earnings on May 7. You can the complete list of today’s Zacks #1 Rank stocks here.
Southwest Gas Corporation Price and EPS Surprise
Southwest Gas Corporation Price and EPS Surprise | Southwest Gas Corporation Quote
PNM Resources Inc. PNM has an Earnings ESP of +3.45% and a Zacks Rank #2. The company’s earnings topped estimates in the last four quarters, with the average positive surprise being 3.45%. It is slated to release first-quarter earnings on May 7, before market open.
PNM Resources, Inc. (Holding Co.) Price and EPS Surprise
PNM Resources, Inc. (Holding Co.) Price and EPS Surprise | PNM Resources, Inc. (Holding Co.) Quote
TerraForm Power, Inc. TERP has an Earnings ESP of +100.00% and a Zacks Rank #2. The company’s average positive surprise in the last four quarters is 39.58%. It is slated to release quarterly earnings on May 7.
TerraForm Power, Inc. Price and EPS Surprise
TerraForm Power, Inc. Price and EPS Surprise | TerraForm Power, Inc. Quote
Atmos Energy Corporation ATO has an Earnings ESP of +0.75% and a Zacks Rank #3. The company’s average four-quarter positive surprise is 2.66%. The company is slated to release first-quarter earnings on May 7, before the opening bell.
Atmos Energy Corporation Price and EPS Surprise
Atmos Energy Corporation Price and EPS Surprise | Atmos Energy Corporation Quote
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