The demand for electricity, natural gas and water is not much affected by fluctuations of the economy. This in a way provides an assurance of steady performance from utility operators. These are preferred by investors due to stability of operations and their capability to reward shareholders with regular dividend payments.
Utility operation is capital intensive, as consistent investment is required to upgrade and maintain infrastructure, which includes transmission and distribution lines, as well as production plants. Usage of modern technology like drones for maintenance and installation of smart meters, as well as strengthening of grids require considerable funding. Apart from internal sources of funds, utilities depend on the credit market for funds to carry on upgrades.
Interest rates have increased a number of times over the last couple of years, which raised this sector’s cost of capital, in turn impacting margins. However, the U.S Fed currently decided to keep the rates unchanged in the near future, which is indeed good news for capital-intensive utility companies.
Cost control, new electric rates, customer growth and stable demand continue to help the utility sector in maintaining operational stability.
Amid the above backdrop, let’s focus on two Zacks Utility - Electric Power industry stocks, namely Brookfield Renewable Partners L.P. and Pinnacle West Capital Corporation (PNW - Free Report) , to ascertain which is a profitable utility choice at the moment.
Brookfield Renewable Partners currently carries a Zacks Rank #2 (Buy) and has a market capitalization of $10.38 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Pinnacle West Capital, currently carrying a Zacks Rank #2, has a market capitalization of $10.83 billion.
Price Performance & VGM Score
In the past six months, units of Brookfield Renewable Partners have rallied 23.4% and that of Pinnacle West Capital have gained 5.5%. The industry recorded 6.6% growth over the same period.
Both the companies currently have an impressive VGM Score of B. Here V stands for Value, G for Growth and M for Momentum, with the score being a weighted combination of all three factors. Back-tested results show that stocks with a favorable VGM Score of A or B coupled with a solid Zacks Rank offer the best investment options.
Long-Term Earnings Growth
Brookfield Renewable Partners’ long-term (three to five years) earnings growth rate is projected at 7%. The same for Pinnacle West Capital is pegged at 4.99%.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing its shareholders’ funds. ROE for Pinnacle West Capital and Brookfield Renewable Partners stands at 9.84% and 1.47%, respectively. Notably, the industry’s ROE currently stands at 9.49%.
The debt-to-capital ratio is a good indicator of a company’s financial position. The indicator shows how much debt is used to run the business. Pinnacle West Capital has a debt-to-capital ratio of 47.86% compared with the industry’s 50.12%. On the contrary, Brookfield Renewable Partners had a debt-to-capital ratio of 35.30% at the end of the first quarter.
Earnings Estimate Revision
The Zacks Consensus Estimate for 2019 and 2020 earnings of Pinnacle West Capital is pegged at $4.85 and $5.08, respectively. Estimates for 2019 were unchanged but the same for 2019 was revised upward by 0.6% in the past 90 days. The Zacks Consensus Estimate for 2019 and 2020 earnings of Brookfield Renewable Partners is pegged at 47 cents and 61 cents, indicating growth of 56.7% and 52.5%, respectively, from the year-ago quarter.
Both the companies have been providing quality services to customers. The ongoing expansion of existing infrastructure will enable these two utilities to serve their expanding customer base more efficiently.
Markedly, it is quite evident from the above comparisons that Brookfield Renewable Partners is a better placed utility stock at the moment.
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