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Rate Hike or Not: 3 Utilities to Flourish in All Seasons

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Utilities, as the name suggests, looks after our regular need for electricity, natural gas, water and daily essential services. Regular upgrade and maintenance of utility infrastructure have become essential to meet the demand of an increasing population, provide high-quality reliable service and comply with stringent regulatory standards.

These capital intensive utilities therefore routinely take recourse to the capital markets to meet the above requirements. Though the regulated utilities are cash generators, the funds generated from internal sources are less than sufficient to carry out long-term projects. Given their business model, the low interest rate scenario helps them to get the much-needed funds on favorable conditions.

Fed Leaves Rates Unchanged

Yesterday, the Federal Reserve kept interest rates unchanged for the time being citing dismal job additions. It was all but a foregone conclusion after May’s disappointing job addition data. The hiring had slowed in April adding 156,000 new jobs as against an expectation of 195,000.  However, in May, only 38,000 new jobs were created, significantly below the consensus estimate of 162,000.

The Fed had raised the interest rate in Dec 2015 for the first time in almost a decade. There were indications of four rate hikes within the next 12 months, provided overall global market conditions were conducive to such a move. However, there has been no rate hike in the first half of 2016, but also no specifics have been given about when the next hike might occur.

The choppy recovery in overall market conditions is coming in the way of a future rate hike decision time and again. The next hike can unfold in three to six months’ time, but a lot depends upon economic recovery. Further, the markets the world over are anxiously waiting for the outcome of the Brexit polls next week, which will decide on UK’s fate of staying or leaving the EU.

Utilities Sector Price Index

Utilities Sector Price Index

Picking the Right Utilities

The clash between interest rate hikes and prospects of the utility sector will always remain. In a rising rate scenario, the interest burden of the utilities will force them to take new initiatives to curtail expenses.

However, there are utilities which do have the financial strength to meet higher debt obligations when rates go north.

Here we have picked three utilities boasting a Zacks Rank #1 (Strong Buy) or #2 (Buy), a current ratio of more than 1 (which signifies the capability of a company to repay current obligation) and and a VGM score of either ‘A’ or ‘B’.  If you want to play the no-rate-hike decision, these stocks will definitely qualify as prudent choices.

3 Top Utility Stocks to Buy Now

Clean Energy Fuels Corp. (CLNE - Free Report) is a pioneer in using natural gas for transportation. The company provides natural gas as an alternative fuel for vehicle fleets in the United States and Canada.

Clean Energy Fuels has a Zacks Rank #1 (Strong Buy), a VGM Score of B and a current ratio of 1.38. The expected long-term earnings growth is 25%. The average positive earnings surprise in the last four quarters is 194.3%. The earnings estimate for the second quarter moved up 18% in the last sixty days.

Spark Energy, Inc. along with its subsidiaries provides electricity and natural gas in 16 states.

Spark Energy has a Zacks Rank #1 (Strong Buy), a VGM Score of A and a current ratio of 1.44. The average positive earnings surprise in the last four quarters is 780.4%. The earnings estimate for the second quarter accelerated 222.2% in the last sixty days.

MDU Resources Group Inc.’s (MDU - Free Report) utility companies provide electric and natural gas services to more than 1 million customers in eight states.

MDU Resources has a Zacks Rank #2 (Buy), a VGM Score of A and a current ratio of 1.39. The expected long-term earnings growth is 7%. The average positive earnings surprise in the last four quarters is 2.4%. The earnings estimate for the second quarter moved up 16.7% in the last sixty days.

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