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5 Picks from The Very Attractive Power Utility Industry
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Power utilities are at an interesting juncture.
On the one hand, the demand for power goes on skyrocketing.
This is not only because of the continually increasing population across the world and in the U.S., along with the growing number of chargeable and power-using digital devices that a modern family typically uses, which in itself is an important driver of demand.
But impending demand is also seen from the electric vehicle (EV) market for both in-home and commercial chargers. This in itself is likely to be a mega growth driver as the market rapidly evolves from hybrids to all-electric over the next few years. Both the federal and state administrations have initiatives to encourage investment in charging infrastructure and Morningstar expects this to be a potentially huge market that power utilities may be able to tap.
The U.S. government is also stepping up investment in the power grid with a view to improving reliability. In an increasingly digital world, key outcomes are impossible to achieve without constant connectivity and power support. The aging infrastructure has been a concern for years now and it looks like the government is finally stepping up.
Over the past year, geopolitics and other factors have driven up energy prices. However, the U.S. Energy Information Administration (EIA) said a couple of months back that an estimated 1% cooling in demand (because of the economic softening), increased generation from cheap renewables and lower natural gas prices will lead to a reduction in wholesale power prices this year. The EIA expects natural gas to account for 39% of total power generation this year, same as the last. Nuclear power will go from 19% to 20%. Generation from renewables is expected to increase from 22% to 24%. Coal’s share will drop from 20% to 17%. Morningstar expects this trend to continue as nuclear generation takes a back seat to renewables (mostly solar, but also wind, and maybe later, hydrogen).
Therefore, utilities find themselves in a position where they have to increase investment, both because of surging demand and because of the opportunity in renewable energy and the EV market. This could mean a reduction in dividend payouts as they take care of their strategic priorities. It is by no means a negative for the industry, because investment for growth is a good thing. And it will secure future dividends.
Another challenge is the growing trend of distributed generation, which is basically the homeowners and businesses that install solar panels and other renewable energy systems, thus producing for their own requirements and supplying surplus into the grid. Distributed generation is challenging the traditional business model of electric power utilities, which rely on large-scale power plants to generate electricity.
At this point, the positives far outweigh the negatives, which is why we should take a look at a few power utility stocks. It’s worth noting that the industry carries a Zacks Rank of 60, placing it in the top 24% of 250 industries classified by Zacks.
Headquartered in Buenos Aires, Argentina, Pampa Energía S.A. is an integrated energy company operating in Argentina. It has four segments: Electricity Generation, Oil and Gas, Petrochemicals, and Holding and Other Business. The company generates electricity through thermal and hydroelectric power plants, as well as a wind farm. It explores and produces oil and gas, manufactures petrochemicals, operates a high voltage electricity transmission network and carries out gas transportation and advisory service operations.
The Zacks Rank #1 (Strong Buy) stock has Value and Growth Scores of A and B, respectively.
Its 2023 estimate is up 12.8% in the last 30 days while the 2024 estimate is up 3.1%.
Pampa shares trade at a 58.2% discount to the industry and a 68.9% discount to the S&P 500. They are also trading close to their median value over the past year.
Calgary, Canada-based TransAlta is an energy company involved in the development, production and sale of electric energy in Canada and the U.S. It operating segments include Hydro, Wind and Solar, Gas, Energy Transition and Energy Marketing. TransAlta also engages in coal electrical generation and mine reclamation activities, and trades power, natural gas and environmental products in the energy market.
The Zacks Rank #1 stock has an A grade for both Value and Growth.
In the last 60 days, the Zacks Consensus Estimate for 2023 has increased 50.8% while that for 2024 dropped 8.9%.
TransAlta shares trade at an 8.4% discount to the industry and a 31.9% discount to the S&P 500. They are also trading at a substantial discount to their median value over the past year.
Essen, Germany-based E.ON SE is an energy company operating in Germany, the UK, Sweden, the Netherlands and other international markets. The company is divided into two segments: Energy Networks and Customer Solutions. The Energy Networks segment operates power and gas distribution networks and provides related services. The Customer Solutions segment supplies power, gas, and heat to residential, commercial and industrial customers. It also offers energy efficiency products and services. E.ON also provides software solutions for gas grids, gas quality tracking, metering and gas property calculations.
The Zacks Rank #2 rated stock has an A for both Value and Growth.
The Zacks Consensus Estimate for 2023 has increased 6.3% in the last 30 days while that for 2024 has increased 2%.
E.ON shares trade at an 14.6% discount to the industry and a 36.5% discount to the S&P 500. They are however trading at a slight premium to their median value over the past year.
Avista is an electric and natural gas utility company operating in the northwestern United States. It provides electric distribution and transmission, and natural gas distribution services in parts of Washington, Idaho, Oregon, and Montana. The company also generates electricity and engages in venture fund investments, real estate investments, and other investments.
The Zacks Rank #2 (Buy) rated stock has a C for both Value and Growth.
Its estimates have remained more or less steady in the last 90 days.
Avista shares trade at a 26.3% premium to the industry and a 6.1% discount to the S&P 500. They are also trading at a 1.4% discount to their median value over the past year.
Con Edison is an energy company that provides electric, gas, and steam delivery services to customers in New York City, Westchester County, southeastern New York, and northern New Jersey. The company is provides reliable, affordable, and sustainable energy.
The Zacks Rank #2 rated stock has a C for Value and D for Growth.
Its estimates for both 2023 and 2024 have increased a penny in the last 30 days.
Edison shares trade at an 33.1% premium to the industry and a 1% discount to the S&P 500. They are also trading at a 4.8% discount to their median value over the past year.
One-Month Price Performance
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5 Picks from The Very Attractive Power Utility Industry
Power utilities are at an interesting juncture.
On the one hand, the demand for power goes on skyrocketing.
This is not only because of the continually increasing population across the world and in the U.S., along with the growing number of chargeable and power-using digital devices that a modern family typically uses, which in itself is an important driver of demand.
But impending demand is also seen from the electric vehicle (EV) market for both in-home and commercial chargers. This in itself is likely to be a mega growth driver as the market rapidly evolves from hybrids to all-electric over the next few years. Both the federal and state administrations have initiatives to encourage investment in charging infrastructure and Morningstar expects this to be a potentially huge market that power utilities may be able to tap.
The U.S. government is also stepping up investment in the power grid with a view to improving reliability. In an increasingly digital world, key outcomes are impossible to achieve without constant connectivity and power support. The aging infrastructure has been a concern for years now and it looks like the government is finally stepping up.
Over the past year, geopolitics and other factors have driven up energy prices. However, the U.S. Energy Information Administration (EIA) said a couple of months back that an estimated 1% cooling in demand (because of the economic softening), increased generation from cheap renewables and lower natural gas prices will lead to a reduction in wholesale power prices this year. The EIA expects natural gas to account for 39% of total power generation this year, same as the last. Nuclear power will go from 19% to 20%. Generation from renewables is expected to increase from 22% to 24%. Coal’s share will drop from 20% to 17%. Morningstar expects this trend to continue as nuclear generation takes a back seat to renewables (mostly solar, but also wind, and maybe later, hydrogen).
Therefore, utilities find themselves in a position where they have to increase investment, both because of surging demand and because of the opportunity in renewable energy and the EV market. This could mean a reduction in dividend payouts as they take care of their strategic priorities. It is by no means a negative for the industry, because investment for growth is a good thing. And it will secure future dividends.
Another challenge is the growing trend of distributed generation, which is basically the homeowners and businesses that install solar panels and other renewable energy systems, thus producing for their own requirements and supplying surplus into the grid. Distributed generation is challenging the traditional business model of electric power utilities, which rely on large-scale power plants to generate electricity.
At this point, the positives far outweigh the negatives, which is why we should take a look at a few power utility stocks. It’s worth noting that the industry carries a Zacks Rank of 60, placing it in the top 24% of 250 industries classified by Zacks.
Pampa Energía S.A. (PAM - Free Report)
Headquartered in Buenos Aires, Argentina, Pampa Energía S.A. is an integrated energy company operating in Argentina. It has four segments: Electricity Generation, Oil and Gas, Petrochemicals, and Holding and Other Business. The company generates electricity through thermal and hydroelectric power plants, as well as a wind farm. It explores and produces oil and gas, manufactures petrochemicals, operates a high voltage electricity transmission network and carries out gas transportation and advisory service operations.
The Zacks Rank #1 (Strong Buy) stock has Value and Growth Scores of A and B, respectively.
Its 2023 estimate is up 12.8% in the last 30 days while the 2024 estimate is up 3.1%.
Pampa shares trade at a 58.2% discount to the industry and a 68.9% discount to the S&P 500. They are also trading close to their median value over the past year.
TransAlta Corporation (TAC - Free Report)
Calgary, Canada-based TransAlta is an energy company involved in the development, production and sale of electric energy in Canada and the U.S. It operating segments include Hydro, Wind and Solar, Gas, Energy Transition and Energy Marketing. TransAlta also engages in coal electrical generation and mine reclamation activities, and trades power, natural gas and environmental products in the energy market.
The Zacks Rank #1 stock has an A grade for both Value and Growth.
In the last 60 days, the Zacks Consensus Estimate for 2023 has increased 50.8% while that for 2024 dropped 8.9%.
TransAlta shares trade at an 8.4% discount to the industry and a 31.9% discount to the S&P 500. They are also trading at a substantial discount to their median value over the past year.
E.ON SE (EONGY - Free Report)
Essen, Germany-based E.ON SE is an energy company operating in Germany, the UK, Sweden, the Netherlands and other international markets. The company is divided into two segments: Energy Networks and Customer Solutions. The Energy Networks segment operates power and gas distribution networks and provides related services. The Customer Solutions segment supplies power, gas, and heat to residential, commercial and industrial customers. It also offers energy efficiency products and services. E.ON also provides software solutions for gas grids, gas quality tracking, metering and gas property calculations.
The Zacks Rank #2 rated stock has an A for both Value and Growth.
The Zacks Consensus Estimate for 2023 has increased 6.3% in the last 30 days while that for 2024 has increased 2%.
E.ON shares trade at an 14.6% discount to the industry and a 36.5% discount to the S&P 500. They are however trading at a slight premium to their median value over the past year.
Avista Corporation (AVA - Free Report)
Avista is an electric and natural gas utility company operating in the northwestern United States. It provides electric distribution and transmission, and natural gas distribution services in parts of Washington, Idaho, Oregon, and Montana. The company also generates electricity and engages in venture fund investments, real estate investments, and other investments.
The Zacks Rank #2 (Buy) rated stock has a C for both Value and Growth.
Its estimates have remained more or less steady in the last 90 days.
Avista shares trade at a 26.3% premium to the industry and a 6.1% discount to the S&P 500. They are also trading at a 1.4% discount to their median value over the past year.
Consolidated Edison, Inc. (ED - Free Report)
Con Edison is an energy company that provides electric, gas, and steam delivery services to customers in New York City, Westchester County, southeastern New York, and northern New Jersey. The company is provides reliable, affordable, and sustainable energy.
The Zacks Rank #2 rated stock has a C for Value and D for Growth.
Its estimates for both 2023 and 2024 have increased a penny in the last 30 days.
Edison shares trade at an 33.1% premium to the industry and a 1% discount to the S&P 500. They are also trading at a 4.8% discount to their median value over the past year.
One-Month Price Performance
Image Source: Zacks Investment Research