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4 Utility Value Stocks to Consider if Rate Slump Continues

Zacks Equity Research

The core of value investing is to pick stocks that are currently trading below their intrinsic value and hold them till their prices improve.

Consistent dividend payout by utilities reduces the possibility of a sudden appreciation in share price. However, value investors could still enter the utility space and locate stocks with strong fundamentals that are presently trading at a discount when compared to industry standards.

The average retail price of electricity continued to slump in 2016. As per a U.S. Energy Information Administration (EIA) release, combined average retail price of electricity (cents per kilowatt hours) dropped 1.25% year over year for all sectors.

According to EIA, the prices of electricity in residential, commercial, industrial and transportation sectors dropped 0.8%, 2.5%, 2.3% and 6.0%, respectively, in 2016. The drop in electricity rates was primarily due to cheap natural gas price and lower demand for power.


While utilities are cash generators, funds generated from internal sources are less than sufficient to carry out long-term projects given their capital intensive nature. In fact, the Mar 2017 interest rate hike is likely to increase the cost of capital and make operations costlier for utilities.

The Fed’s recent rate hike raises concern for the capital intensive utility industry, one may bet on some value stocks from the industry to gain significantly with the odds of the Fed failing to raise rates, as hinted.      

Given the rate hike scenario and the possibility of a slump in electricity rates, we fall back on our style score system. This positive score allows investors to eliminate the negative aspects of stocks and pick the winners. Our research shows that stocks with a Value Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value investing space.

Our Utility Picks

New Orleans, LA based Entergy Corporation ETR is primarily engaged in electric power production and retail distribution of power. The stock saw solid earnings estimate revisions over the past 60 days with the Zacks Consensus Estimate for 2017 rising 9.1% to $5.02 per share. The stock currently sports a Zacks Rank #2 and a Value Style Score of ‘B.’

Entergy Corporation Price and EPS Surprise

 

Entergy Corporation Price and EPS Surprise | Entergy Corporation Quote

The stock is presently trading at a P/E multiple of 14.99, lower than the industry average of 18.49. The long term earnings growth is presently pegged at 1.30%.

San Jose, CA based SJW Group SJW, through its subsidiaries, provides water utility services in the United States. The stock saw earnings estimate revisions over the past 60 days with the Zacks Consensus Estimate for 2017 rising 3.9% to $2.15 per share. The stock currently sports a Zacks Rank #2 and a Value Style Score of ‘B.'

SJW Corporation Price and EPS Surprise

 

SJW Corporation Price and EPS Surprise | SJW Corporation Quote

The stock is presently trading at a P/E multiple of 22.25, lower than the industry average of 22.81.

Based in Madrid, Spain, Telefonica S.A.TEF provides fixed-line telephone services, wireless communications, Internet access, video and data transmission services, to approximately 313 million customers. The stock saw solid earnings estimate revisions over the past 60 days with the Zacks Consensus Estimate for 2017 rising 16.7% to 84 cents per share. The stock has a Value Style Score of ‘B’ and currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Telefonica SA Price and EPS Surprise

 

Telefonica SA Price and EPS Surprise | Telefonica SA Quote

The stock is presently trading at a P/E multiple of 13.45, lower than the industry average of 15.31. The long term earnings growth is pegged at 55.53% at the moment.

Gardena, CA based Polar Power, Inc. POLA designs, manufactures, and sells direct current (DC) power systems for applications in the telecommunications, military, electric vehicle charging, cogeneration, distributed power, and uninterruptable power supply markets. The stock saw earnings estimate revisions over the past 60 days with the Zacks Consensus Estimate for 2017 rising 5.3% to 60 cents per share. The stock currently sports a Zacks Rank #2 and a Value Style Score of ‘B.’

The stock is currently trading at a P/E multiple of 13.33, lower than the industry average of 18.49.


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Entergy Corporation (ETR): Free Stock Analysis Report
 
SJW Corporation (SJW): Free Stock Analysis Report
 
Telefonica SA (TEF): Free Stock Analysis Report
 
Polar Power, Inc. (POLA): Free Stock Analysis Report
 
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