The U.S. economy grew at a lower-than-expected rate of 0.2% during the first quarter of 2015 due to a stronger dollar, the decline in oil prices and a sluggish global economy. In this context, utilities have a more domestic focus and there is hardly any substitute for its services.
Moreover, the utility industry is capital intensive and needs to access external sources of funds to expand its operations. The low interest rate environment, which has for sometime been near zero level, has been extremely conducive for its growth. With slowing economic growth and soft job additions in the first quarter, the Fed has in its latest statement last Wednesday retreated to a more dovish stance about interest rate hikes (read: 2 Utility Stocks for Low-Rate Environment).
Apart from rate hikes and policy changes in Washington, the utility sector is also at the mercy of the weather Gods. Winter played a minor role during the first quarter of 2015. The quarter was up against difficult comparisons as the prior-year period was hit by severe winter temperatures due to the polar vortex, which drove record demand for natural gas and electricity.
The U.S. Energy Information Administration (EIA) projects electricity sales to commercial customers to increase 1.7% in 2015 and 1.4% in 2016. Sales to industrial customers are expected to rise 1.3% in 2015 and 1.1% in 2016. While residential demand is expected to increase 1.8% in the rest of 2015, it is projected to decline 1.1% in 2016.
On the back of rising demand, the EIA forecasts U.S. electricity generation to increase by an average of 1.2% in 2015 and 0.6% in 2016. The average electricity rates across the U.S. are also likely to increase in 2015. Investments to strengthen transmission and distribution infrastructure and usage of more renewable sources will primarily drive regulated utility rates. The combination of higher sales and unit prices makes a strong case for the utilities this year.
The drop in oil prices since the second half of 2014 has created a stir among the oil export dependent economies. Since oil prices are expected to remain low over the best part of 2015, it will surely impact the oil export oriented nations. In addition, a weak euro zone and slower-than-expected recovery in China are bound to increase the domestic focus of the U.S. investors.
Apart from expanding their business organically, the players in the utility space are entering into strategic merger and acquisition (M&A) deals, which lead to cost synergies and better utilization of resources. Three major players in this space, Exelon Corporation (EXC), NextEra Energy (NEE) and Wisconsin Energy Corporation (WEC), are currently in the midst of M&A deals that are expected to close in 2015 subject to all necessary approvals.
The utility sector earnings in the first quarter 2015 are expected to grow at 8.5% on the back of a 0.3% improvement in total revenues. In comparison, earnings for the S&P 500 group are expected to improve 1.6% from the same period last year on 3.3% lower revenues.
As per the U.S. Bureau of Economic Analysis, consumer spending in the U.S. in the first quarter of 2015 increased to $11,173.1 billion from $11,119.6 billion in the fourth quarter of 2014. In addition, as per HousingEconomics.com, building permit in the U.S. in the first three months of 2015 increased 9% year over year to 241,100. These point toward a likely increase in demand for utility services in the upcoming quarters.
Given the uncertain markets abroad and the uncertainty over the domestic interest rates hike, focusing on the utility stocks, which have consistent dividend payment histories and share buyback programs, is a prudent step.
How to Select the Earnings Plays?
Selecting the best stocks from the Electric Utility space may appear to be a daunting task. This is where we fall back on our proprietary methodology. It’s fairly simple – stocks with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP are the ones that are likely to surpass earnings estimates this announcement.
Earnings ESP is our proprietary methodology for determining stocks that have a high probability of delivering earnings surprises in their next 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%.
Here are three utility stocks that are currently equipped with the right combination of elements to post an earnings beat:
Wisconsin Energy Corp. (WEC) has a Zacks Rank #2 and an Earnings ESP of +2.44%. The Zacks Consensus Estimate for the company’s first-quarter earnings is 82 cents.
Wisconsin Energy has delivered positive earnings surprises in three of the trailing four quarters with an average beat of 7.8%. The long-term earnings growth is pegged at 6%.
Based in Milwaukee, WI, Wisconsin Energy Corporation is a diversified holding company, engaged in the generation and distribution of electricity in southeastern, east central and northern Wisconsin, as well as in the upper peninsula of Michigan.
Wisconsin Energy Corp. is scheduled to announce its first-quarter 2015 financial results before the market opens on May 5.
Sempra Energy (SRE) has a Zacks Rank #3 and an Earnings ESP of +12.21%. The Zacks Consensus Estimate for the company’s first-quarter earnings is $1.31.
Sempra Energy has delivered positive earnings surprises in three of the trailing four quarters with an average beat of 8.2%. The long-term earnings growth is pegged at 8.48%.
Based in southern California, Sempra Energy is an energy services holding company involved in the sale, distribution, storage and transportation of electricity and natural gas. The company’s businesses are broadly divided into Sempra Utilities, Sempra International and Sempra U.S. Gas & Power.
Sempra Energy is scheduled to announce its first-quarter 2015 financial results before the market opens on May 5.
Southwest Gas Corporation (SWX) has a Zacks Rank #3 and an Earnings ESP of +1.26%. The Zacks Consensus Estimate for the company’s first-quarter earnings is $1.59 per share.
Southwest Gas Corporation has delivered positive earnings surprises in three out of the trailing four quarters with an average beat of 34.7%. The long-term earnings growth is pegged at 5.5%.
Based in Las Vegas, NV, Southwest Gas Corporation is engaged in purchasing, transporting and distributing natural gas in portions of Arizona, Nevada and California. As of December 31, 2014, it had 1,930,000 residential, commercial and industrial natural gas customers.
Southwest Gas Corporation is scheduled to announce its first-quarter 2015 financial results on May 5.
To Sum Up
The utility sector is expected to outpace the performance of the S&P 500 in 2015. Earnings in the utility space are expected to improve 4.2% in 2015 compared with a 0.8% rise for the S&P 500. Moreover, a hesitant Fed lends support to an interest-rate sensitive sector like the utilities.
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EXELON CORP (EXC): Free Stock Analysis Report
NEXTERA ENERGY (NEE): Free Stock Analysis Report
WISC ENERGY CP (WEC): Free Stock Analysis Report
SEMPRA ENERGY (SRE): Free Stock Analysis Report
SOUTHWEST GAS (SWX): Free Stock Analysis Report
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