Utility stocks’ fourth-quarter results have started to roll in. The current scenario indicates negative earnings growth for this mature Zacks Utility Sector in the fourth quarter of 2018, with a 7.3% year-over-year decline on a 2.6% fall in revenues. For more details, refer to our latest Earnings Outlook.
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, 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. Per the U.S. Energy Information Administration (EIA), total electricity sold in the United States during November 2018 improved 0.8% year over year, while revenues for the month improved 2.2% year over year.
How Q4 Earnings is Shaping Up
As of Jan 29, 136 S&P 500 members released fourth-quarter results. Total earnings for these companies are up 12.6% from the same period last year on 5.9% higher revenues, with 69.1% beating EPS estimates and 60.3% beating revenue estimates.
Most of the Zacks sectors (13 out of 16) are expected to perform well in the fourth quarter of 2018, with overall S&P 500 earnings expected to be up 11% from the same period last year on 5.5% 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
Ameren Corporation AEE has an Earnings ESP of +1.68% and a Zacks Rank #1. The company’s earnings topped estimates in the last four reported quarters, the average positive surprise being 15.4%. The company is slated to release earnings on Feb 14, before the market opens. You can seethe complete list of today’s Zacks #1 Rank stocks here
Ameren Corporation Price and EPS Surprise
Ameren Corporation Price and EPS Surprise | Ameren Corporation Quote
ALLETE Inc. ALE has an Earnings ESP of +5.26% and a Zacks Rank #2. The company’s earnings topped estimates in the last quarter, with a positive surprise of 9.33%. The company is slated to release earnings on Feb 14, before the market opens.
Allete, Inc. Price and EPS Surprise
Allete, Inc. Price and EPS Surprise | Allete, Inc. Quote
Portland General Electric Company POR has an Earnings ESP of +4.19% and a Zacks Rank #. The company’s earnings topped estimates in the last four quarters, with the average positive surprise being 13.32%. The company is slated to release earnings on Feb 15, before the market opens.
Portland General Electric Company Price and EPS Surprise
Portland General Electric Company Price and EPS Surprise | Portland General Electric Company Quote
Pinnacle West Capital Corp. PNW has an Earnings ESP of +1.19% and a Zacks Rank #2. The company’s earnings topped estimates in three out of the last four quarters, with the average positive surprise being 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
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