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Xcel Energy's Systematic Investments Bode Well, Debts a Risk

AEE XEL DTE AVA

Trades from $3

On Nov 9, 2016, we issued an updated report on Xcel Energy Inc. (XEL - Free Report) . The company’s long-term investment plans will strengthen its operations and help it to serve its expanding customer base in a more reliable and efficient manner. However, rising debt levels is a concern, given that its debt/capital ratio is presently higher than the industry average.

Recently, Xcel Energy reported third-quarter operating earnings of 90 cents per share, outpacing the Zacks Consensus Estimate of 87 cents by 3.5%. Quarterly earnings also improved 7.1% on a year-over-year basis. Meanwhile, Xcel Energy’s third-quarter revenues of $3,040.1 million surpassed the Zacks Consensus Estimate of $2,965 million by 2.5% and were up 4.8% from the prior-year quarter level of $2,901.3 million.

Xcel Energy continues to invest substantially in its utility assets to provide reliable services to its customers and to effectively meet the rising electricity demand. The company’s capital expenditure budget of $18.4 billion (for the 2017–2021 period) is directed toward transmission, distribution, electric generation and renewable projects. Sizeable investments are expected to drive rate base growth of 5.4% compounded annually, thereby aiding the top line. Xcel Energy will fund the capital program with cash flows, existing debts and by issuing new debts.

Moreover, economic improvement is increasingly evident across Xcel Energy’s service territories, especially in Minnesota, in comparison with the nation as a whole. The consolidated unemployment rate in the company’s service territory was 3.5% in September, lower than the national average of 5%. The company witnessed customer additions of 1% in the third quarter that resulted in electric sales growth of 1.6% in the quarter. It’s thus clear that market optimism continues to drive Xcel Energy’s sales. Going forward, the company’s performance is likely to improve with the gradual economic recovery.

However, Xcel Energy’s long-term debt has increased from the 2011 level of $8.8 billion to $13.4 billion in third-quarter 2016. Rising debt levels translate into higher interest cost burden, which eats into the company’s margins.

Besides, Xcel Energy’s debt/capital ratio stands at 55% compared to the industry average of 50% and the S&P 500 level of 42.6%. Note that the higher the debt relative to its capital, the higher the financial leverage and risk of default.

Zacks Rank & Key Picks

Xcel Energy carries a Zacks Rank #2 (Buy). Other favorably placed stocks in the same space include Ameren Corporation (AEE - Free Report) , DTE Energy Company (DTE - Free Report) and Avista Corp. (AVA - Free Report) .

Ameren Corp. has seen three upward estimate revisions over the last month for 2016. The stock carries a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.

DTE Energy, another Zacks Rank #2 stock, has seen six upward estimate revisions over the last two months for the full year.

Avista has seen one upward estimate revision over the last month for 2016. The stock carries a Zacks Rank #2.

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