The Zacks Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to residential, commercial and industrial customers. Most of these companies are regulated and have operations in highly competitive markets. 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 are working in its favor. In addition, 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.
Let's take a look at the industry’s three major themes:
- Utilities are focusing on adding energy storage projects to their portfolio and providing clean energy to customers. The industry participants are investing in battery storage devices that will help in transition toward usage of clean sources and boost usage of renewable energy as fuel sources, thereby lending support to the grid during peak demand periods. The U.S. Energy Information Administration (“EIA”) projects that utility scale battery storage capacity will increase over the long term. As of March 2019, 899 megawatt (“MW”) of battery storage projects was being operated in the United States. By 2023, EIA expects battery storage power capacity to exceed 2,500 MW, provided the currently planned additions are completed and no current operating capacity is retired.
- Electricity from clean sources is another key area of work. With new power plants being installed, overall electricity generation is going to increase in the United States. EIA forecasts renewable sources to contribute 17% of electricity production in 2019 and nearly 19% in 2020.The share of natural gas will be 37% in 2019 and 2020 each. Both renewable energy and natural gas continue to eat away the share of coal in electricity generation, which is expected to average 25% in 2019 and 22% in 2020.
- One of the most significant developments in the utility space is the awareness of energy efficiency programs, and implementation of the same in residential and commercial buildings and industrial plants. Utilities of the United States are spending billions of dollars in educating their customers about the benefits of proper and effective usage of energy. Usage of government certified ENERGY STAR products helps customers to lower its utility bills by nearly 30% in a year, without compromising on energy usage. This helps in lowering emission and allows utility operators to continue serving a wider customer base without developing a costly new power plant.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a thriving near term. The 65-stock Utility - Electric Power industry is housed within the broader Utilities Sector and currently carries a Zacks Industry Rank #65, which places it at the top 25% 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 25% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since May 2019, the industry’s earnings estimates for the current year have been revised upward by 3.8%.
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 Beats S&P 500 and Sector on Shareholder Returns
The Utility Electric Power industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months.
The industry has gained 14.6% compared with its sector’s gain of 0.7% and the Zacks S&P 500 composite’s gain of 7.1% in the period.
One-Year Price Performance
Industry’s Current Valuation
On the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) TTM ratio, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 12.66X compared with the S&P 500’s 11.08X and the Utilities sector’s 17.46X.
Industry EV/EBITDA TTM vs S&P 500
Industry EV/EBITDA TTM vs Sector
In the past five years, the industry has traded as high as 12.74X, as low as 7.83X, with a median of 9.75X.
To Sum Up
Capital-intensive Utility companies are concerned about continued increase in interest rates. After increasing interest rates for nine times since December 2015, the Fed lowered interest rates twice in recent months, which is definitely a positive development for utilities. Another rate cut is expected before the end of the year and the industry participants are taking advantage of this to lower their capital costs by refinancing their high-cost debts with low-cost ones.
Moreover, cost control, new electric rates and customer growth should continue to help the players maintain operational stability. However, as per EIA forecasts, winter this year is going to be less severe than last year and is expected to lower the utility bills of customers.
The utility industry being a mature one has a quite a few members in the elite S&P 500 group. Below we present a few top-ranked stocks from the Utility Electric Power industry that have been witnessing positive earnings estimate revisions and are members of the S&P 500.
NRG Energy (NRG - Free Report) sports a Zacks Rank #1 (Strong Buy) and is headquartered in Houston, TX. This utility has gained 7.1% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has moved up 1.6% over the past 60 days to $3.89. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: NRG
DTE Energy Company (DTE - Free Report) , a Zacks Rank #2 (Buy) stock, is headquartered in Detroit, MI. This utility has gained 17.9% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has inched up 0.1% over the past 60 days to $6.22.
Price and Consensus: DTE
American Electric Power Company (AEP - Free Report) , a Zacks Rank #2 stock, is headquartered in Milwaukee, WI. This utility has gained 30% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has inched up 0.1% over the past 30 days to $4.13.
Price and Consensus: AEP
WEC Energy Group (WEC - Free Report) a Zacks Rank #2 stock, is headquartered in Milwaukee, WI. This utility has gained 38% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has inched up 0.3% over the past 60 days to $3.53.
Price and Consensus: WEC