The utility sector continues with its steady performance, courtesy of its domestic focus which insulates it from international turmoil. The regulated nature of operation offers significant stability to earnings. Since we do not have any viable alternative for basic needs like water and electricity, demand for services provided by these companies are hardly ever impacted by economic downturns.
However, due to its capital-intensive nature, utilities need to approach capital markets for funds. So, a low interest rate environment acts as a tailwind for this sector. However, the Dec 2016 interest rate hike by the Federal Reserve, along with its plans for three more this year if economic conditions are favorable, does not bode well for utilities. An increase in interest rates hurts utilities significantly and impacts their ability to pay regular dividends. This could make bonds a more attractive investment option than utilities in a rising interest rate environment.
Nonetheless, Donald Trump’s Presidency is expected to be a boon for the defensive and domestic-oriented utilities. During his election campaign, Trump had vowed to lower the regulatory pressure on domestic manufacturers and suggested increased investment in energy infrastructure. The new government is expected to favor utilities and not pursue the implementation of the carbon emission reduction target set by the Clean Power Plan as aggressively as the previous administration.
The country’s real gross domestic product increased at an annual rate of 1.9% in the fourth quarter of 2016, as per estimates released by the Bureau of Economic Analysis. The U.S. economy is also showing consistent signs of improvement with the unemployment rate declining to 4.7% in Dec 2016 from 5.0% in Dec 2015, per the data released by Bureau of Labor Statistics. These factors will contribute to higher consumption and increased demand for utility services.
The fourth-quarter 2016 earnings season is well underway, with nearly 33.9% of the S&P 500 members having released their earnings as of Jan 27. Total earnings of these S&P members are up 6.0% year over year on 3.1% higher revenues. Overall, total S&P 500 earnings are expected to be up 5.2% on 4% higher revenues, with growth expected in the positive territory for 11 of the 16 Zacks sectors.
Q4 earnings in the Utility sector are expected to improve 3% on 15.2% growth in revenues.
Here are few companies from the mature utility sector that have the potential to beat earnings in their upcoming releases.
Selecting the Right Ones
Picking the right stocks to add to your portfolio could seem quite daunting given the huge number of companies operating in the utility space. One way to narrow the list down this earnings season is to look at stocks that have a solid Zacks Rank and a positive Earnings ESP. The combination of a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) and a positive Earnings ESP is usually a meaningful indicator of an earnings beat.
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to pull a surprise in their next 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.
The stocks mentioned below have a beta less than 1, which means that these stocks are less volatile than the market.
Applying the above strategy, we have selected four utility stocks that have a greater possibility of posting an earnings beat in the coming days:
Exelon Corporation (EXC)
Exelon, along with its subsidiaries, has operations across 48 states and the District of Columbia in the U.S. as well as in Canada. The company will invest nearly $25.3 billion in the 2016–2020 time period to strengthen the existing infrastructure, and expand its renewable and fossil fuel generating capacity.
Exelon has a Zacks Rank #2 and an Earnings ESP of +2.27%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has a long-term earnings growth expectation of 4.33% and a forward P/E of 13.31. It has a beta of 0.2 and has delivered an average positive earnings surprise of 9.88% over the trailing four quarters.
The company is expected to report fourth-quarter 2016 results on Feb 8.
Portland General Electric Company (POR)
Portland General Electric Company engages in the generation, wholesale purchase, transmission, distribution, and retail sale of electricity in the state of Oregon.
Portland General Electric has a Zacks Rank #2 and an Earnings ESP of +1.56%. The company has a long-term earnings growth expectation of 6.09% and a forward P/E of 18.40. It has a beta of 0.28.
The company is expected to report fourth-quarter 2016 results on Feb 17.
Entergy Corporation (ETR)
Entergy is primarily engaged in electric power production and retail distribution of power. It distributes electricity to 2.8 million customers in Arkansas, Louisiana, Mississippi and Texas. Entergy stated its plans to invest $10.3 billion in the 2017–2019 time frame, including $4.36 billion for generation, $2.84 billion for distribution and $2.45 billion for transmission.
Entergy has a Zacks Rank #3 and an Earnings ESP of +15.39%. The company has a forward P/E of 15.51. The company has a beta of 0.38 and has delivered an average positive earnings surprise of 59.60% over the trailing four quarters.
The company is expected to report fourth-quarter 2016 results on Feb 15.
Pinnacle West Capital Corporation (PNW)
Pinnacle West Capital, through its subsidiaries, provides electricity services (wholesale or retail) in the state of Arizona. The company is involved in the generation, transmission and distribution of electricity from coal, nuclear, gas, oil and solar. Pinnacle West projects capital expenditure of $$1,337 million and $1,124 million in 2017 and 2018, respectively. The company expects to invest heavily in infrastructure upgrades to serve its expanding customer base.
Pinnacle West has a Zacks Rank #2 and an Earnings ESP of +4.08%. The company has a long-term earnings growth expectation of 4.92% and a forward P/E of 17.99. It has a beta of 0.27.
The company is expected to report fourth quarter 2016 results on Feb 24.
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