The near-term prospects of the Zacks
Utility – Electric Power industry stocks have been adversely impacted by the outbreak of the novel coronavirus, which lowered demand for electricity. The disruptive weather condition in Texas and some other states last month also resulted in power outages. However, with the rollout of vaccines and resumption of economic activities demand for utility services from the Commercial and Industrial (C&I) group is picking up. Demand from the residential group continues to remain stable and at times compensates for the loss in demand from C&I group. Even during the lean demand period. utilities worked toward increasing operational resilience, lowering expenses and investing in a consistent manner to boost infrastructure and offer services more efficiently. The prevailing near-zero level interest rates is helping in generating necessary funds for capital projects. Most of the utilities operating in the United States ensured 24X7 supply of electricity, water and natural gas to customers even if they failed to pay their utility bills and provided relaxation to those in financial distress. The easing of restrictions and rollout of vaccines are expected to boost demand for electricity from all customer classes. NextEra Energy ( NEE Quick Quote NEE - Free Report) , with large renewable operations, offers an excellent opportunity to stay invested in the utility space. Other utilities that are worth holding in your portfolio include DTE Energy Company ( DTE Quick Quote DTE - Free Report) , Edison International ( EIX Quick Quote EIX - Free Report) , TransAlta Corporation ( TAC Quick Quote TAC - Free Report) and CenterPoint Energy ( CNP Quick Quote CNP - Free Report) About the Industry
The Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to residential, commercial and industrial customers. A substantial portion of utilities’ earnings is generated from regulated operations while other portions come from competitive markets. 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.
Widely available coal once used to be the key source of electricity in the United States. However, courtesy of the shale gas revolution and conscious efforts toward generating more electricity from clean sources, natural gas gradually replaced coal. Natural gas’ clean burning nature, vast availability and low prices work in its favor. In addition, a decline in the cost of setting up utility scale power projects based on renewable energy sources is helping utilities to replace coal from their generation portfolio. 3 Electric Power Industry Trends to Watch Out For : The U.S. Energy Information Administration (EIA) forecasts that after declining 3.8% in 2020, the demand for electricity is going to increase by 2.1% in 2021. Per an EIA finding, despite power outage in February, estimated U.S. residential consumption during the first quarter of 2021 was 10% higher than at the same time in 2020. EIA also forecasts retail sales of electricity in the commercial and industrial sectors in 2021 to increase by 0.7% and 3.7%, respectively. For 2022, EIA forecasts total electricity consumption to grow by another 1.4%. This is a clear indication of the opening up of economic activities, as there is more medical expertise and knowledge to deal with the virus. This is encouraging information for the utilities following a sharp decline of demand from C& I group during the pandemic period. Demand for Electricity Continues to Increase : A gradual and definite transition in the U.S. utility space in quite evident with more operators voluntarily announcing long-term plans to go carbon neutral or substantially lower emission from the historical levels. EIA forecasts renewable sources to contribute 21% of U.S. electricity production in 2021 and 23% in 2022, up from 20% in 2020. The share of natural gas to power generation will drop to 36% in 2021 from 39% in 2020, primarily due to increase in natural gas prices. However, as prices of natural gas come back to normal levels, natural gas share in electricity generation will increase. Both renewable energy and natural gas continue to eat into the share of coal in electricity generation. Move Toward Cleaner Sources to Generate Power : A concerted effort could be noticed among the utility operators to cut down on emission and focus on ways that will assist in achieving carbon neutrality. The government is helping to increase usage of renewable through tax credits. However, utilities on their own are investing in research and development activities, and cleaner fuel and using new technology to ensure efficient usage of energy. Per international Energy Agency, grid investments should be nearly $2.2 trillion by 2030 to modernize the electricity network. Electricity storage unit will help in development of more renewable power generation units. EIA expects that with the implementation of U.S. laws and policies, large-scale battery storage capacity will grow from 1 GW in 2019 to 17 GW in 2050. Concerted Effort to Achieve Net-Zero Emission by 2050 Zacks Industry Rank Indicates Weak Prospects
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The 62-stock Utility - Electric Power industry is housed within the broader Utilities sector and currently carries a Zacks Industry Rank #195, which places it in the bottom 23% 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential. Since Mar 31 2020, the industry’s earnings estimates for the current year have been revised downward by 23.8% to $2.37. 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 Lags S&P 500 & Sector
The Utility Electric Power industry has underperformed its own sector and the Zacks S&P 500 composite over the past 12 months. The industry has gained 9.9% compared with its sector’s rise of 15.9% and the Zacks S&P 500 composite’s increase of 61.6% in the period.
Price Performance (One year) 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 11.7X compared with the S&P 500’s 17.58X and the Utilities sector’s 17.44X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs) Industry EV/EBITDA TTM vs Sector (5yrs)
In the past five years, the industry has traded as high as 13.41X, as low as 8.04X, with a median of 11.44X.
5 Electric Power Industry Stocks to Keep a Close Watch On NextEra Energy: Juno Beach, FL-based NextEra Energy is engaged in the generation, transmission, distribution and sale of electric energy. The company has plans to invest $50-$55 billion in different projects in the 2019-2022 time period. These investments will be directed toward modernizing and strengthening the existing infrastructure, and generating more electricity from clean sources to lower carbon emissions. Its current dividend yield is 2.07%, which is better than the Zacks S&P 500 Composite group’s average of 1.38%. The Zacks Consensus Estimate for NextEra Energy’s 2021 and 2022 earnings has gone up by 0.4% and 0.8% respectively in the past 60 days. The stock has gained 35.2% over the past 12 months. NextEra Energy currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Price and Consensus: NEE DTE Energy Company: Detroit, MI-based DTE Energy Company along with its subsidiaries is engaged in regulated and unregulated energy businesses. The company currently expects to make capital investments of $14 billion over the 2021-2025 period to strengthen its existing infrastructure. DTE Energy aims at cutting down carbon emissions in power generation by 55% in 2030 and further by 100% in 2050 from the 2005 levels. Its current dividend yield of 3.5% is better than S&P 500 group’s average. The Zacks Consensus Estimate for DTE Energy’s 2021 and 2022 earnings has gone up by 1.8% and 1.3% respectively in the past 60 days. The stock has gained 30.6% over the past 12 months. DTE Energy currently has a Zacks Rank #3. Price and Consensus: DTE Edison International: Rosemead CA -based Edison International through its subsidiaries, generates and distributes electric power. The company currently expects to make capital investments in the range of $14.7-$15.2 billion over the 2021-2023 period to strengthen its existing infrastructure. The company is also aiming to become carbon neutral by 2045. Its current dividend yield of 4.55% is better than S&P 500 group’s average. The Zacks Consensus Estimate for Edison International’s 2021 and 2022 earnings has gone up by 0.5% and 0.4% respectively in the past 60 days. The stock has gained 8% over the past 12 months. DTE Energy currently has a Zacks Rank #3. Price and Consensus: EIX
TransAlta Corporation: Calgary, Canada -based TransAlta Corporation operates as a non-regulated electricity generation and energy marketing company in Canada, the United States, and Western Australia. The company aims to cut carbon emission to zero by 2050. Its current dividend yield of 1.61% is better than S&P 500 group’s average. The Zacks Consensus Estimate for TransAlta’s 2021 earnings has gone up by 8.3% in the past 60 days. The stock has gained 79.8% over the past 12 months. The company currently has a Zacks Rank of 3. Price and Consensus: TAC CenterPoint Energy: Houston, TX-based CenterPoint Energy is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations. The company plans to invest $16.73 billion from 2021 through 2025 to fortify its operations. CenterPoint Energy established a goal to reduce its operational emissions by 75% by 2035 from 2005 levels.Its current dividend yield of 3.01% is better than S&P 500 group’s average. The Zacks Consensus Estimate for CenterPoint Energy’s 2021 earnings has gone up by 1.4% in the past 60 days. The stock has gained 36.9% over the past 12 months. The company currently has a Zacks Rank of 3. Price and Consensus: CNP