With the Q3 earnings season kicking off, Utility companies are preparing to release their numbers in the next couple of weeks. Notably, the Zacks Utility sector gained 3% in the third quarter.
Factors Boosting the Utilities
A major factor which boosts the utility sector is that there exists no substitute for the energy-related services rendered by the utilities. The endless demand for electricity and utility services will never cease to exist, thereby conferring a consistent flow of revenue to these companies. Thus utilities are considered as a safe haven.
Utilities generate more or less stable earnings unless any sudden event impacts their operations adversely. This regulated nature of operations provide them stability and in turn they reward their shareholders with steady dividend rates.
Moreover, the predominant domestic focus shields utilities from foreign currency translation issues. Also the major utility providers make frequent modernizations of their grid system and distribution networks to offer seamless flow of electricity to customers. In fact, it is these modernization initiatives that saved the grid systems from getting severely damaged from the widespread hurricane rampage that hit the coastal U.S. in the last couple of months.
Further, stringent emission regulations implemented by Obama prompted utilities to take steps to lower emission levels. Although it is a favorable development from the environmental point of view, utilities had to make huge investments to ease the transition to renewables.
However, President Trump’s recent initiative to repeal the Clean Power Plan on economic growth grounds is expected to give a temporary breather to utilities that produce major part of their electricity from coal.
On the other hand, realizing the need for clean energy a number of major utility providers like NextEra Energy and Duke Energy Corporation (DUK - Free Report) have already taken initiatives to produce electricity from natural gas and alternative sources. Considering the fact that renewable energy is the ultimate future of energy resources, these initiatives will boost the growth of alternative-energy utilities, in the long run.
We believe, over time, a constructive utility-rate environment and increase in electricity production from natural gas and renewable sources will enable utilities to efficiently serve a larger customer base.
Earnings Expectations for Utilities
Per our Earnings Trend, as of Oct 11, Q3 earnings for the Utility sector is expected to be down 2.9%, while sales for the same is estimated to be up by 1.5%. Operations of major utilities like NextEra, Duke Energy and American Electric Power Corporation (AEP - Free Report) that have extensive business in the hurricane-affected states of Texas and Florida were affected adversely. Although a minor section of their grid system got damaged severely, they were compelled to stall electricity distribution. These outages are expected to weigh on their Q3 earnings, which in turn may have dragged down this sector’s overall earnings expectation for the quarter.
Nevertheless, going ahead, in 2017, this sector is expected to exhibit an earnings improvement of 2.1% and sales growth of 4.4%. This indicates an improvement in the results of these stocks ahead of Q3.
How to Identify Potential Winners
Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do it is by picking stocks that have the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Moreover, investors constantly seek stocks that not only maintain stability but produce respectable returns for shareholders. Keeping that in mind, we have herein added Return on Equity (ROE) in our selection criteria for screening high cash returning utility stocks that are poised to beat Q3 earnings.
5 Solid Bets
Here are five utility stocks that have the right combination of elements to deliver positive earnings surprises, with a ROE greater than 10%, in their upcoming announcements:
BCE, Inc. (BCE - Free Report) is Canada’s largest communications service provider and serves as the holding company for Bell Canada. The company provides local and long-distance phone service to approximately 70% of the Canadian population, primarily in Ontario and Quebec.
The company is slated to release results on Nov 2. The company has an Earnings ESP of +0.49% and carries a Zacks Rank #2. The company’s ROE ratio is 21.08%. You can see the complete list of today’s Zacks #1 Rank stocks here.
NextEra Energy, Inc. (NEE - Free Report) is a public utility holding company engaged in the generation, transmission, distribution, and sale of electric energy. The company has both regulated and non-regulated energy-related products and services.
The Zacks Rank #3 company, having an Earnings ESP of +4.25%, is slated to release results on Oct 30. The company’s ROE ratio is 11.88%.
NewJersey Resources Corporation (NJR - Free Report) provides retail & wholesale natural gas & related energy services to customers from the Gulf Coast to New England.
It is slated to release results on Nov 16. The company has an Earnings ESP of +47.83% and carries a Zacks Rank #3. The company’s ROE ratio is 12.77%.
Southern Company (SO - Free Report) is one of the largest utilities in the United States that currently serves approximately nine million customers through 11 electric and natural gas distribution units in nine states.
The Zacks Rank #3 company, with an Earnings ESP of +7.21%, is slated to release results on Nov 1. The company’s ROE ratio is 11.30%.
Entergy Corporation (ETR - Free Report) is primarily engaged in electric power production and retail distribution of power. The company has 30,000 megawatt (MW) of generating capacity including more than 10,000 MW of nuclear fuel capacity.
It is slated to release results on Oct 24. The company has an Earnings ESP of +2.03% and carries a Zacks Rank #3. The company’s ROE ratio is 14.08%.
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