The Zacks 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 earnings of these utilities is generated from regulated operations in highly competitive markets. Unless there is substantial weather variation, 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, 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:
- One of the major drawbacks of clean renewable sources is their lack of ability to produce 24x7 power like fossil fuel based electricity plants. The industry participants are investing in battery storage devices that will support the usage of clean sources and assist in storage of excess production from renewable energy sources. Batteries will not only support the grid but will also provide power when there is demand but no production from renewable sources due to natural causes. The U.S. Energy Information Administration (“EIA”) projects utility scale battery storage capacity to increase over the long term. As of the end of March 2019, 899 megawatt (“MW”) of battery storage projects were 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.
- A transition in the United States utility space in quite evident with more operators voluntarily announcing long-term plans to go carbon neutral or lower emission substantially from historical levels. Utilities are moving away from coal and have started to focus on clean natural gas and renewable sources to generate electricity. EIA forecasts renewable sources to contribute 20% of electricity production in 2020 and 21% in 2021.The share of natural gas will be 38% in 2020 and fall slightly to 37% in 2021. Both renewable energy and natural gas continue to eat away the share of coal in electricity generation, which is expected to average 21% in both 2020 and 2021 down from 24% in 2019. Per EIA’s prediction, renewable sources will be the largest contributor to United States’ energy mix by 2050.
- 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 their 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 solid near-term prospects. The 65-stock Utility - Electric Power industry is housed within the broader Utilities Sector and currently carries a Zacks Industry Rank #109, which places it in the top 43% 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 43% 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 December 2019, the industry’s earnings estimates for the current year have been revised upward by 0.6%.
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 its own sector and the Zacks S&P 500 composite over the past 12 months.
The industry has gained 22.2% compared with its sector’s gain of 2.8% and the Zacks S&P 500 composite’s increase of 20.5% 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, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 13.22X compared with the S&P 500’s 12.31X and the Utilities sector’s 19.12X.
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 13.22X, as low as 7.81X, with a median of 9.96X.
To Sum Up
Capital-intensive Utility companies are concerned about continued increase in interest rates. After increasing interest rates nine times since December 2015, the Fed lowered interest rates thrice in 2019. We are unlikely to see any rate changes in 2020, which is definitely a positive development for utilities. Utilities are taking this opportunity 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. The utility industry being a mature one has a quite a few members in the S&P 500 group. Below we present a few S&P 500 stocks from the Utility Electric Power industry that have been witnessing positive earnings estimate revisions.
NextEra Energy Inc. (NEE - Free Report) a Zacks Rank #3 (Hold) stock, is headquartered in Juno Beach, FL. This utility has gained 51.9% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has inched up 0.2% over the past 60 days to $9.06.
Price and Consensus: NEE
DTE Energy Company (DTE - Free Report) , a Zacks Rank #3 stock, is headquartered in Detroit, MI. This utility has gained 10.5% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has inched up 1.5% over the past 60 days to $6.63. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: DTE
CMS Energy Corporation (CMS - Free Report) , a Zacks Rank #3 stock, is headquartered in Jackson, WI. This utility has gained 30.4% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has moved up 0.4% over the past 60 days to $2.67.
Price and Consensus: CMS
Duke Energy Corporation (DUK - Free Report) , a Zacks Rank #3 stock, is headquartered in Charlotte, NC. This utility has gained 14.9% over the past 12 months. The Zacks Consensus Estimate for current-year EPS has moved up 0.4% over the past 60 days to $1.17.
Price and Consensus: DUK