The Zacks Utility – Electric Power industry involves the process of generation, transmission, distribution and sale of electricity to residential, commercial and industrial customers. Most of these companies are regulated and operate in a competitive market. The demand for the services provided by these utilities remains more or less steady, regardless of economic cycles.
Widely available coal was the source of majority of electricity in the United States in the past. However, courtesy of shale gas revolution and conscious efforts to generate more electricity from clean sources, natural gas replaced coal in the United States as a major source of fuel for generating electricity. Natural gas’ clean burning nature, wide availability and low prices are working in its favor.
Let's take a look at the three major themes of the industry:
- The utility operators in the United States are focused on producing more electricity from clean sources. This is evident from the U.S. Energy Information Administration (“EIA”) release that 23.7 gigawatts (“GW”) of new capacity will be added while 8.3 GW of capacity will be retired in the United States in 2019. Of the planned retirement in 2019, 53% will be coal-based production, while the majority or 46% of the planned additions will come from wind sources.
- The utility operators are continuously investing to upgrade and strengthen their existing electricity transmission, as well as distribution networks. The utilities are also installing smart meters, which provide accurate details of electricity usage to customers as well providers, and ensure quick deployment of crew during outages, increasing customer satisfaction. Drones and new technology are being used for maintenance of the supply lines and keeping them ready to face weather-related challenges. The utilities are taking initiatives toward undergrounding of transmission lines to ensure safety and increase resilience of the network during extreme weather conditions.
- The EIA projects that utility scale battery storage capacity will increase by 34 GW during the 2020-2050 time period due to ongoing decline in battery storage costs. The utilities, which are working toward providing clean energy throughout the day to customers, are investing in battery storage devices that will boost the usage of more renewable fuel sources and provide support to the grid during peak demand periods.
Zacks Industry Rank Indicates Positive Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates rosy prospects in the near term. The 64-stock Utility - Electric Power industry is housed within the broader Utilities Sector and currently carries a Zacks Industry Rank #70, which places it at the top 28% of more than 250 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 positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are confident of this group’s earnings growth potential. Since November 2018, the industry’s earnings estimates for the current year have been revised upward by 0.7%.
We will present a few Utility - Electric Power stocks that one can bet on given their growth prospects. Before delving into the stocks, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Beats S&P 500 and Sector on Shareholder Returns
The Utility Electric Power industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months.
The industry has gained 3.9% against its sector’s decline of 0.4% and the Zacks S&P 500 composite’s fall of 7.1% in the period.
One-Year Price Performance
Valuation of Utility Electric Power Industry
On the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) TTM ratio, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 11.08X compared with the S&P 500’s 10.41X and the Utilities sector’s 13.09X.
In the past five years, the industry has traded as high as 11.28X, as low as 7.83X, with a median of 9.76X.
EV/EBITDA Ratio - Industry vs S&P 500
EV/EBITDA Ratio - Industry vs Sector
To Sum Up
The capital-intensive Utility companies are concerned about the continuous increase in interest rates. The interest rates have increased nine times since December 2015, which is in turn increasing the capital servicing expenses of these utilities and compromising their ability to pay dividend. However, the Federal Reserve, after increasing the interest rates for four times in 2018, reduced rate hike possibilities to two in 2019 from the earlier expectation of three. The cautious approach of the Fed is indeed good news for the utility space.
Moreover, cost control, new electric rates and customer growth should continue to help the companies in this space to maintain operational stability.
At present, we have a few top-ranked stocks from the Utility Electric Power industry that have been witnessing positive earnings estimate revisions.
CenterPoint Energy (CNP), a Zacks Rank #2 (Buy) stock, is headquartered in Houston, TX. This utility has gained 5.3% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has inched up 0.18% over the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Price and Consensus: CNP
CMS Energy Corporation (CMS), a Zacks Rank #2 stock, is headquartered in Jackson, MI. This utility has gained 14.6% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has been revised 0.09% upward over the past 30 days.
Price and Consensus: CMS
Pinnacle West Capital Corp. (PNW) is a Zacks Rank #2 stock based out of Phoenix, AZ. This utility has gained 7.3% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 0.2% upward over the past 30 days.
Price and Consensus: PNW
Southern Company (SO) is a Zacks Rank #1 stock based out of Atlanta, GA. This utility has gained 5.9% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 0.32% upward over the past 30 days.
Price and Consensus: SO
Zacks' Top 10 Stocks for 2019
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