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Utility ETFs Down Post Mixed Q2 Earnings

Zacks Equity Research

The utility sector failed to impress in its second-quarter results with earnings barely beating lowered estimates and revenues coming in lower than expectations. This is also true for some of the major players in the space like Duke Energy Corporation DUK, NextEra Energy NEE and Dominion Resources Inc. D.

As per our Earnings Trends report, earnings of all the utility companies that have reported so far are up 9.2% year over year for the second quarter of 2016, with 56.5% of the companies beating the Zacks Consensus Estimate. Meanwhile, revenues are down nearly 0.4% for the quarter, with only 17.4% of them surpassing the consensus mark. Owing to dull results, the utility sector ETFs turned red over the last 10 days despite having a good year so far (read: Low Volatility ETFs in Vogue Despite a Bull Market).

However, global growth slowdown, geopolitical turmoil, unimpressive domestic data, see-sawing oil prices and the unseen impact of Brexit continue to haunt the markets. Thus, the utility sector, which is considered to be one of the defensive options when the market is exhibiting a high level of volatility, could see a turnaround in the coming days (read: Are Boring ETFs the Best Bet This Season?).

Below we have highlighted the quarterly results of the aforementioned utility companies in detail.

Duke Energy

Duke Energy reported adjusted earnings of $1.07 per share for the quarter that came in above the Zacks Consensus Estimate of $1.01. Quarterly earnings increased 12.6% year over year thanks to higher retail revenues from pricing and rider recoveries, lower expenses, and higher contribution from the North Carolina Eastern Municipal Power Agency (NCEMPA) acquisition. Total revenue was $5,484 million, lagging the Zacks Consensus Estimate of $5,751 million by 4.6%. The company maintained its 2016 earnings guidance in the range of $4.50 to $4.70 per share.

NextEra Energy

NextEra Energy’s quarterly adjusted earnings of $1.67 per share beat the Zacks Consensus Estimate of $1.58 by 5.7%. Earnings climbed 7.1% year over year on the back of higher revenues from NextEra Energy Resources. Revenues of $3.8 billion were much below the Zacks Consensus Estimate of $4.5 billion and decreased 12.4% from the year-ago level. NextEra reiterated its earnings guidance of $5.85–$6.35 for 2016.

Dominion Resources

Dominion Resources’ quarterly earnings of 71 cents per share were in line with the Zacks Consensus Estimate. Earnings decreased 2.7% from 73 cents per share in the prior-year quarter due to mild weather conditions in its service territory and a planned refueling outage at Millstone. The company’s operating revenues of $2.6 billion missed the Zacks Consensus Estimate of $2.7 billion by 5.1% and declined about 5.4% year over year.

Dominion expects to earn 95 cents to $1.10 per share for the third-quarter 2016 compared with $1.03 per share in the year-ago period. The company expects earnings for 2016 in the range of $3.60 to $4.00 per share.

ETFs in Focus

Due to mixed results many utility stocks turned red over the past 10 days, sending the related ETFs down. However, given that the market is exhibiting a high level of volatility, these ETFs could see a trend reversal in the coming days. Below we discuss four of these ETFs having a sizeable exposure to the above stocks, holding a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see all Utilities/Infrastructure ETFs here).

Utilities Select Sector SPDR Fund XLU

XLU is one of the most popular products in the space with nearly $8.4 billion in AUM and average daily volume of roughly 16.1 million shares. The fund tracks the Utilities Select Sector Index and holds 30 stocks with NextEra Energy, Duke Energy and Dominion Resources among the top five spots with a combined exposure of nearly one-fourth of its total assets. Sector-wise, Electric Utilities (62.4%) dominates the fund followed by Multi-Utilities (33.2%). The fund charges 14 bps in investor fees per year. The ETF has witnessed a loss of 1.15% in the past 10 days (read: What is in Store for These Utility ETFs this Earnings Season?).

Vanguard Utilities ETF VPU

This ETF tracks the MSCI US Investable Market Utilities 25/50 Index. The fund holds 82 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are among the top four stocks in the fund with a combined exposure of a little more than 20%. More than half of the fund’s assets are invested in Electric Utilities followed by Multi-Utilities (29%). The fund has amassed almost $2.4 billion in its asset base and trades in a moderate volume of 318,000 shares per day. The fund has a low expense ratio of 0.10%. The ETF has plunged 1.2% in the last 10-day period.

iShares U.S. Utilities ETF IDU

The fund follows the Dow Jones U.S. Utilities Sector Index and holds 55 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are placed among the top five stocks in the fund, together accounting for a share of approximately 21% of total assets. On a sectoral basis, Electric Utilities (58.6%) and Multi-Utilities (29.8%) hold the top two positions in the fund. The fund manages an asset base of around $1.1 billion and exchanges about 250,000 shares per day. It is a bit expensive with 44 bps in annual fees. IDU was down 1.2% over the last 10 days (read: Utility ETFs Always a Safe Option for the Investors).

Fidelity MSCI Utilities ETF FUTY

This ETF tracks the MSCI USA IMI Utilities Index. The fund holds 79 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are among the top four in the fund with a combined exposure of a little more than 20%. More than half of the fund’s assets are invested in Electric Utilities followed by Multi-Utilities (29%). The fund has amassed almost $280.3 million in its asset base and trades in a moderate volume of 119,000 shares per day. The fund has an expense ratio of 0.08%.FUTY was down 1.2% over the last 10 days.

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NEXTERA ENERGY (NEE): Free Stock Analysis Report
 
DUKE ENERGY CP (DUK): Free Stock Analysis Report
 
DOMINION RES VA (D): Free Stock Analysis Report
 
SPDR-UTIL SELS (XLU): ETF Research Reports
 
VIPERS-UTIL (VPU): ETF Research Reports
 
ISHARS-US UTIL (IDU): ETF Research Reports
 
FID-UTILITY (FUTY): ETF Research Reports
 
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