The prospects of the Zacks
Utility – Electric Power industry look better in 2H21 than the comparable prior-year period as demand for utility services from the Commercial and Industrial (C&I) group is picking up on the vaccination drive and resumption of economic activities. Demand from the residential group remains stable as some employees are still working from home. The National Oceanic and Atmospheric Administration’s climate prediction center has forecast another above-normal Atlantic hurricane season for 2021. Per NOAA, in 2021, there is a 60% chance of an above-normal season, 30% chance of a near-normal season and 10% chance of a below-normal season. Utilities operating in the United States have been gaining experience from each hurricane season and taking measures to strengthen their infrastructure. They have worked toward increasing operational resilience, lowering expenses and investing consistently to boost infrastructure and offer services more efficiently. The prevailing near-zero level interest rates are 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. 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 T he Southern Company ( SO Quick Quote SO - Free Report) , Xcel Energy Inc. ( XEL Quick Quote XEL - Free Report) , WEC Energy Group ( WEC Quick Quote WEC - Free Report) and Entergy Corporation ( ETR Quick Quote ETR - 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. 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. The shale gas revolution and conscious efforts toward generating more electricity from clean sources and natural gas gradually replaced coal. Research and development over the years have resulted in a substantial decline in the cost of setting up utility-scale power projects based on renewable energy sources. This 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, retail sales for electricity would increase by 2.8% in 2021 and 1% in 2022. Per an EIA finding, electricity sales during 2H21 will grow by 1.2% from 2H20. The EIA also forecasts retail sales of electricity in the commercial and industrial sectors to increase by 2.1% and 5.1%, respectively, in 2021. For 2022, EIA forecasts total electricity consumption from the commercial and industrial sectors to grow 1.4% and 2.6%, respectively. This is an 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 in the C&I group during the pandemic period. Demand for Electricity Continues to Increase : Per EIA, the U.S. electric power sector will generate 2.1% more power during 2021 than in 2020 and generation is expected to improve further by 0.7% in 2022. 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 by 8.4% in 2021 from the 2020 levels, primarily due to an 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 emissions and focus on ways that will assist in achieving carbon neutrality by 2050. The government is helping to increase the usage of renewable through tax credits. Utilities on their own are investing in research and development activities, focusing on cleaner fuel and using new technology to ensure efficient usage of energy. Per the International Energy Agency, global grid investments should go up to $820 billion per year by 2030 from the present level of $260 billion per year to modernize the electricity network. The utilities are focused on setting up large-scale battery storage projects across the United States, which will help in the development of more renewable power generation units. Increasing usage of clean sources will assist in achieving the carbon neutrality target. 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 60-stock Utility - Electric Power industry is housed within the broader Utilities sector and currently carries a Zacks Industry Rank #198, which places it in the bottom 22% 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 a 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. In a year’s time, the industry’s earnings estimates for the current year have been revised downward by 19.6% to $2.24. 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 13.2% compared with its sector’s rise of 13.8% and the Zacks S&P 500 composite’s increase of 36.5% in the same time 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 12.72X compared with the S&P 500’s 17.76X and the Utility 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 13.37X, as low as 8.14X, with a median of 11.61X.
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. NextEra has said it expects to reduce its carbon emission intensity by 67% by 2025 from the 2005 levels. Its current dividend yield is 1.98%, which is better than the Zacks S&P 500 Composite group’s average of 1.36%. The Zacks Consensus Estimate for NextEra Energy’s 2021 earnings has gone up by 0.4% in the past 90 days. The stock has gained 15.9% over the past 12 months. NextEra Energy currently has a Zacks Rank #3 (Hold). Price and Consensus: NEE The Southern Company: Atlanta, GA-based Southern Company is one of the largest utilities in the United States. The company has set a net zero emission goal by 2050. The company has plans to invest $3.5.7 billion in different projects in the 2021-2025 time period. Its current dividend yield is 4.2%. The Zacks Consensus Estimate for Entergy’s 2021 earnings has gone up by 0.3% in the past 90 days. The stock has gained 21.4% over the past 12 months. Southern Company currently has a Zacks Rank #3. Price and Consensus: SO Xcel Energy: Minneapolis, MN-based Xcel Energy Inc. through its subsidiaries distributes and sells electricity and natural gas. The company is going to invest $24.3 billion in the 2021-2025 time period with a focus of adding more renewable assets to its generation portfolio. The company through its well-chalked-out plan is set to achieve 80% carbon reduction by 2030 and 100% carbon-free electricity by 2050. Its current dividend yield of 2.65% is better than Zacks S&P 500 composite group’s average. The Zacks Consensus Estimate for Xcel Energy’s 2021 earnings has gone up by 0.7% in the past 90 days. The stock has gained 7.6% over the past 12 months. Xcel Energy currently has a Zacks Rank #2 (Buy). Price and Consensus: XEL WEC Energy Group: Milwaukee, WI-based WEC Energy Group is a diversified holding company engaged in the generation and distribution of electricity. WEC Energy is also focused on replacing older facilities with zero-carbon-emitting renewable and natural gas-based generation by 2025 and aims to achieve carbon neutrality by 2050. In the 2021-2025 timeframe, it plans to invest $16.1 billion. Its current dividend yield is 2.84%. The Zacks Consensus Estimate for WEC Energy’s 2021 earnings has gone up by 0.3% in the past 90 days. The stock has gained 8.9% over the past 12 months. The company currently has a Zacks Rank of 2. Price and Consensus: WEC Entergy Corporation: New Orleans, LA-based Entergy Corporation, is primarily engaged in electric power production and retail distribution of power. The company plans to invest $11.65 billion in the 2021-2023 timeframe to strengthen its existing infrastructure. In September 2020, Entergy Corp. announced plans to accelerate its climate action goals with a commitment to achieve net-zero carbon emissions by 2050. Its current dividend yield is 3.6%. The Zacks Consensus Estimate for Entergy’s 2021 earnings has gone up by 0.5% in the past 90 days. The stock has gained 10.4% over the past 12 months. Entergy currently has a Zacks Rank #2. Price and Consensus: ETR