For Immediate Release
Chicago, IL – November 14, 2022 – Today, Zacks Equity Research discusses American Electric Power Co. AEP, PG&E Corporation PCG, Consolidated Edison ED and NRG Energy, Inc. Inc. NRG.
Industry: Electric Utility
The Zacks Utility – Electric Power industry stocks continue their transition toward clean sources of fuel and focus on lower carbon emissions. Utilities are benefiting from rate hikes and efficient cost management. The utility stocks are also focused on strengthening the grid as well as transmission and distribution infrastructure. The huge infrastructure of the utilities faces the impact of the hurricane season each year. Infrastructure enhancement around the year increases the resilience of the entire system, reduces outages and allows operators to restore power quickly for customers affected by storms.
American Electric Power Co., with a large investment to expand renewable operations, its widespread transmission and distribution assets, and well-chalked-out capital investments to boost infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities worth adding to your portfolio include PG&E Corporation, Consolidated Edison and NRG Energy, Inc. Inc.
About the Industry
The Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to customers. A substantial portion of utilities’ earnings is generated from regulated operations. Unless there is any major weather variation or unprecedented incidents, such as the coronavirus pandemic, demand for the services provided by utilities remains more or less steady, regardless of economic cycles.
A clear transition is evident in this industry, with more companies declaring zero-emission goals on their own. Research and development over the years have resulted in a substantial decline in the cost of setting up utility-scale renewable power projects aiding in the reduction of emissions. However, the ongoing increase in interest rates is a concern for capital-intensive utilities.
3 Electric Power Industry Trends to Watch Out For
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward the cleaner sources of energy to produce electricity. Per EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 20% in 2021 to 22% in 2022 and 24% in 2023 as a result of the continuing addition of solar and wind-generating capacity. EIA expects total solar, wind generation and battery storage addition of 38 GW and 54 GW to be added in 2022 and 2023, respectively.
The expansion of renewable energy continues to eat into the share of coal in electricity generation, and EIA expects coal contribution to electricity generation to fall from 23% in 2021 to 20% in 2022 and further to 19% in 2023. EIA also expects the share of natural gas in power generation to drop from 38% in 2022 to 36% in 2023. The government is helping to increase the usage of renewable energy through tax credits, and operators are cutting down emissions on their own, intending to achieve carbon neutrality by 2050.
Demand For Electricity Can Decline: Per EIA, 2023 electricity generation in the United States can drop 2% from the 2022 levels due to a decline in demand. EIA believes that the expected drop in demand for electricity in 2023 will be due to a cooler temperature forecast that would lead to less requirement for cooling and slight economic contraction. Despite the expected drop in demand, the addition of new renewable energy assets in the total generation portfolio will continue.
Ongoing Increase Rate is a Concern: Utilities to maintain, upgrade and expand operations to approach the capital markets for loans to fund their capital projects. Utilities regularly distribute dividend from their profits and don’t necessarily have enough retained profits to fund capital projects. The utilities have been enjoying near-zero interest rates for the past few years, but with six hikes have now pushed the benchmark rate to a range of 3.75%-4%, and more rate hikes are likely in the future.
The increasing interest rates are a concern for capital-intensive utilities in the United States as they will push up capital servicing costs substantially from the current levels. U.S. utilities are currently spending a substantial amount on developing an advanced electricity network. Utilities might try to pass on the burden of increasing borrowing costs to customers, but the necessary raise in rates might not get approved by the commission. In such a scenario, the utilities will need to digest the extra expenses, which can lower their profitability and make them less attractive to investors interested in the utility space.
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 strong near-term prospects. The 59-stock Utility - Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #71, which places it in 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the upward earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential.
Before we present a few Utility - Electric Power stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and current valuation.
Industry Outperforms S&P 500 and Sector
The Utility Electric Power industry has outperformed the Zacks S&P 500 and its own sector over the past 12 months. The industry has declined 4.6%, narrower than its sector’s drop of 5.2% and the Zacks S&P 500 composite’s decline of 20.9% in the same period.
Industry's Current Valuation
On the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) TTM, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 15.4X compared with the S&P 500’s 11.11X and the Utility sector’s 18.1X.
In the past five years, the industry has traded as high as 18.13X, as low as 10.4X, with a median of 12.92X.
4 Electric Power Industry Stocks to Focus On
American Electric Power Company Inc.: Columbia, OH-based American Electric Power generates and distributes electricity to residential, commercial, industrial and wholesale end markets. American Electric Power has plans to invest $40 billion in different projects in the 2023-2027 time period. AEP’s current dividend yield is 3.78%, which is better than the Zacks S&P 500 Composite group’s average of 1.71%.
The Zacks Consensus Estimate for American Electric Power’s 2022 earnings has gone up by 0.6% in the past 60 days. AEP’s long-term (three to five years) earnings growth is pegged at 6.2%. The AEP stock has gained 11.1% over the past year against its industry’s decline of 4.7%. American Electric Power currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PG&E Corporation: San Francisco, CA-based PG&E Corporation provides electricity and natural gas to customers. PG&E Corp. has plans to invest $50 billion in different projects in the 2022-2026 time period. The company has a solid portfolio of regulated utility assets that offer a stable earnings base and substantial long-term growth potential. The Zacks Consensus Estimate for PG&E Corp.’s 2022 earnings has gone up by 1.8% in the past 60 days. PCG’s long-term earnings growth is pegged at 2.5%. The PCG stock has gained 19.8% over the past year. PG&E Corp currently has a Zacks Rank #2.
Consolidated Edison, Inc.: New York-based Consolidated Edison. is a diversified utility holding company, with subsidiaries engaged in both regulated and unregulated businesses. The company has a capital expenditure plan of $15.7 billion for the 2022-2024 period, out of which nearly 30% will be dedicated to expanding its renewable energy portfolio.
ED’s current dividend yield is 3.6%. The Zacks Consensus Estimate for Consolidated Edison’s 2022 earnings has gone up by 1.4% in the past 60 days. ED’s long-term earnings growth is pegged at 2%. The ED stock has gained 17.2% over the past year. Consolidated Edison currently has a Zacks Rank #2.
NRG Energy Inc: Houston, TX- based NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers. NRG aims to invest $405-$430 million in 2023 to strengthen its operations. NRG’s current dividend yield is 3.28%.
NRG Energy currently has a Zacks Rank #2. The Zacks Consensus Estimate for NRG Energy’s 2022 earnings has gone up nearly 24% in the past 60 days. NRG’s long-term earnings growth is pegged at 12.1%. The NRG stock has gained 28.4% over the past year.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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