The Q2 earnings season is gathering steam, with total earnings of 87 S&P 500 members that have already reported improving by +20.9% from the same period last year on +10.3% higher revenues. In this positive scenario, let us figure out how the Utility sector is poised to perform this season. Earnings from Utility are expected to improve 1.8% in Q2 on the back of a 1.3% gain in revenues.
Utility stocks are expected to gain from new rates in their service territories, customer growth and effective management of expenses, which should have a positive impact on earnings this quarter.
The unemployment rate in the United States during the second quarter was in the range of 3.8% to 4.0%. This historic low level of unemployment boosted demand for new housing units, and in turn the requirement for utility services. As per data provided by U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housings units completed in June 2018 were 2.2% higher than the year-ago quarter.
Per a U.S. Energy Information Administration (“EIA”) report, first-half 2018 residential electricity sales were 7.5% higher than the comparable year-ago period, primarily due to colder weather prevailing in the current year, which will also have a positive impact on earnings. In addition, during the first half of 2018 electricity demand from commercial and industrial sectors also improved from the year-ago period.
EIA forecasts 2.7% higher U.S. electricity generation in 2018 than last year and total electricity generation across all sectors to average 11.3 gigawatthours per day, which would be the highest level of generation since 2010. These are the reasons for the strong and steady performance of utility operators.
However, these utilities do have their share of challenges, like a rising debt level, stringent regulations and the hurricane season, which can wreak havoc on infrastructure. Rising interest rates make bonds a strong investment option as interest rate hike increases cost of capital of the utility, impacting margins and comprising on their ability to pay or hike dividend rates.
The Federal Reserve hiked interest rates in June, marking the seventh increase since December 2015, and the rate currently stands at 2%. We could see more rate hikes decisions from the Fed as GDP is expected to grow by 4% in the second quarter coupled with an improving employment scenario. Despite the rate hikes, we find the utilities fundamentally strong enough to come up with positive surprises this season.
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 for investors. 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 the estimates.
Per our proprietary methodology, Earnings ESP is a determining factor for zeroing in on stocks with the 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 portfolios, we have highlighted four Utility stocks that might stand out with an earnings beat in the upcoming releases.
Utility Stocks Set to Outperform Q2 Earnings Estimates: NRG Yield (NYLD)
Princeton, NJ-based NRG Yield (NYSE:NRG), along with its subsidiaries, owns and operates a diversified portfolio of contracted renewable and conventional generation, and thermal infrastructure assets in the United States.
With a Zacks Rank #1 and an Earnings ESP of +11.77%, NRG Yield looks well poised for a positive surprise.
NRG Yield will announce second-quarter results on Aug 2.
Utility Stocks Set to Outperform Q2 Earnings Estimates: Algonquin Power & Utilities (AQN)
Oakville, Canada based Algonquin Power & Utilities (NYSE:AQN) through its subsidiaries, owns and operates regulated and non-regulated generation, distribution, and transmission utility assets in Canada and the United States.
With a Zacks Rank #1 and an Earnings ESP of +15.38%, Algonquin Power & Utilities looks well-poised for a positive surprise.
Algonquin Power & Utilities will announce second-quarter results on Aug 9.
Utility Stocks Set to Outperform Q2 Earnings Estimates: Dominion Energy Inc. (D)
Richmond, VA-based Dominion Energy (NYSE:D) together with its subsidiaries produces and transports energy in the United States.
With a Zacks Rank #2 and an Earnings ESP of +7.17%, Dominion Energy looks well-poised for a positive surprise.
Dominion Energy will announce second-quarter results on Aug 1.
Utility Stocks Set to Outperform Q2 Earnings Estimates: Eversource Energy (ES)
Springfield, MA based Eversource Energy (NYSE:ES) engages in the energy delivery business. It transmits and delivers electricity and natural gas to over 3.7 million residential, commercial and industrial customers.
With a Zacks Rank #2 and an Earnings ESP of +1.00%, Eversource Energy looks well-poised for a positive surprise.
Eversource will announce second-quarter results on Aug 1.
Utility Stocks Set to Outperform Q2 Earnings Estimates: Ameren Corporation (AEE)
St. Louis, MO based Ameren Corp (NYSE:AEE) generates and distributes electricity and natural gas to nearly 2.4 million electric and more than 900,000 gas customers.
With a Zacks Rank #2 and an Earnings ESP of +1.69%, Ameren Corporation looks well-poised for a positive surprise.
Ameren will announce second-quarter results on Aug 3.
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