Capital intensive Utility stocks’ third-quarter results have started rolling in. The trend so far indicates another positive earnings growth picture from this mature Zacks Utility Sector. As of Oct 31, 44.8% of Utility stocks have already released quarterly results, reflecting 18.0% year-over-year earnings growth on 1.3% growth in revenues. Per the latest Earnings Outlook, the overall Q3 picture of the Utility sector is a positive one, with earnings expected to improve 9.3% year over year and the growth pace steadily improving as the reporting cycle unfolds.
Overall, utilities will benefit from the new rates in their service territories, customer growth, effective management and control of expenses through the introduction of new technology. In addition, strengthening of transmission and distribution networks, which lowered outage time, is going to have a positive impact on earnings. Non-availability of replacement of services provided by utilities is the biggest driving force.
We notice initiatives by major utility companies to curb emission from their respective generation portfolio and focus on usage of higher percentage of clean and renewable assets. Utilities are also concentrating on the battery storage project and as per Energy Storage release the battery storage capacity in the United States has exceeded 1 GWh. These battery storage projects support the entire system during peak demand, help in regulating power voltage fluctuation and make renewable power available for a longer period. More electricity storage is on its way due to its benefit in the total electricity value chain.
Furthermore, unemployment rate in the United States during the end of third quarter dropped to 3.7%. This historic low level of unemployment boosted demand for new housing units and in turn the requirement for utility services. Per the U.S. Energy Information Administration (EIA), total electricity sold in the United States during the third quarter 2018 improved year over year driven by higher consumption from residential, commercial and transportation sectors.
The EIA forecasts 3.6% higher U.S. electricity generation in 2018 than last year and total electricity generation across all sectors to average 11.397 gigawatthours per day — the highest level of generation since 2010. These are the reasons for the strong and steady performance of utility operators.
However, capital-intensive utilities do have their share of weaknesses. Rising interest rates are constantly increasing the cost of capital, which will hurt margins and compromise on its ability to raise dividend rates. The Federal Reserve increased interest rates in September 2018, marking the eighth hike since December 2015, with more hikes expected ahead. In addition, utilities also need to adhere to stringent environmental regulations, and withstand challenges from hurricanes and storms.
How Q3 Earnings is Shaping Up
As of Oct 31, 313 S&P 500 members have released third-quarter results. Total earnings for these companies are up 22.7% from the same period last year on 8.4% higher revenues, with 78% beating EPS estimates and 62.6% beating revenue estimates.
Most of the Zacks sectors (15 out of 16) are expected to perform well in the third quarter of 2018, with overall S&P 500 earnings expected to be up 23.2% from the same period last year on 7.6% higher revenues.
Ways to Pick Winners in the Utility Space
Choosing the right stock for one’s portfolio from too many participants is certainly a tough job. An easy way to streamline the list is by selecting stocks with a positive Earnings ESP and a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which will help in surpassing estimates.
Per our proprietary methodology, Earnings ESP is a determining factor for zeroing in on stocks with maximum chance of beating on earnings in the next announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Please check our Earnings ESP Filter that enables you to come across stocks with potential to outshine earnings estimates this reporting cycle.
Our research shows that the stocks with the perfect combination of the two key ingredients have 70% chances of a positive earnings surprise.
For investors seeking to apply this proven model to their portfolio, we have highlighted four Utility stocks that beat on earnings in the upcoming releases.
Our Utility Picks
PNM Resources, Inc. (PNM - Free Report)
Albuquerque, NM-based PNM Resources., along with its subsidiaries, engages in energy and energy-related businesses in the United States.
With a Zacks Rank #1 and an Earnings ESP of +1.2%, PNM Resources looks well poised for a positive surprise. You can seethe complete list of today’s Zacks #1 Rank stocks here.
PNM Resources will announce third-quarter results on Nov 6.
The AES Corporation (AES - Free Report)
Arlington, VA-based The AES Corporation owns and/or operates power plants to generate and sell power to customers spread across five continents in 18 countries.
With a Zacks Rank #2 and an Earnings ESP of +1.43%, AES Corporation looks well poised for a positive surprise.
AES Corporation will announce third-quarter results on Nov 6.
Southern Company (SO - Free Report)
Atlanta, GA-based Southern Company is one of the largest utilities in the United States. The company serves nearly serves nine million customers through its 11 electric and natural gas distribution units in nine states.
With a Zacks Rank #2 and an Earnings ESP of +0.37%, Southern Company looks well poised for a positive surprise.
Southern Company will announce third-quarter results on Nov 7.
Alliant Energy Corporation (LNT - Free Report)
Madison, WI-based, Alliant Energy Corporation is a holding company with subsidiaries engaged in regulated electric and natural gas services. On Dec 31, 2017, the company owned 42,300 miles of electric distribution and 9,600 natural gas lines.
With a Zacks Rank #3 and an Earnings ESP of +1.19%, Alliant Energy looks well poised for a positive surprise.
Alliant Energy Corporation will announce third-quarter results on Nov 6.
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