The prospects of the Utility sector are tied to the economic health of a nation. A positive movement in the economy is felt willy-nilly across most sectors, with utilities being one of the major beneficiaries. Demand for industrial, commercial and residential utility services see an upward spike when a country is in good economic health. On the other side of the coin, utility services play a vital role in a nation’s economic progress as cheap and abundant supply of power keeps the wheels of development rolling.
As per a U.S. Energy Information Administration (EIA) report, total energy use in the U.S. will increase to 106.3 quadrillion Btu in 2040 from 95 quadrillion Btu in 2012. Most of this demand is expected to come from the industrial sector followed by the commercial sector. While demand for energy from the industrial sector is expected to increase 25.5% over the aforesaid period, the commercial sector is improving at a clip of 18.6% year over year.
So, from the above projection, we can safely deduce that there is significant room for development for utility operators. If the economy continues to move in the right track, the demand for utility services will continue its northward journey.
Admittedly, regulations will get even more stringent, environmentalists will clamor for climate plans and stricter proposals will be in place to set up coal-fired power units. All these would put immense pressure on power producing units. But will it in any way result in a decline in electricity production? Will the power plants shut down all boilers? We all know the answers to these questions.
Utilities are now gradually shifting their emphasis towards natural gas and alternate energy sources to produce power. In addition, producers using coal are installing scrubbers to lower emissions. The proactive steps taken by the utilities to harness new sources of energy to produce green power could take care of the environmental issues and disarm the detractors. For example, ocean wave technology has the potential to become the next big thing in the power generation industry.
As the sector has a bright prospect, it is perhaps the right time to look for an investment opportunity. Stocks with the potential to beat earnings in the upcoming announcement should see faster price appreciation in the short term.
How to Pick the Right Stocks?
With a number of industry players, selecting the correct stocks may appear to be a daunting task. This is where our proprietary methodology comes in handy. 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 beat earnings estimates this announcement.
Earnings ESP is our proprietary methodology for determining stocks that have high chances of delivering earnings surprises 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%.
Here are two utility stocks that are currently equipped with the right combination of elements to post an earnings beat.
Pepco Holdings Inc. (POM)
Washington, District of Columbia based Pepco Holdings Inc. along with its subsidiaries, is engaged in the distribution of electricity and natural gas. Pepco Holdings, also known as PHI, is one of the largest energy delivery companies in the Mid-Atlantic region. The company delivers electricity to more than 1.9 million customers in the Mid-Atlantic region and natural gas to about 125,000 customers in Delaware.
Pepco Holdings currently has a $5.13 billion market capitalization and carries a Zacks Rank #3 (Hold).The Earnings ESP for the fourth quarter 2013 is +14.29%.
Pepco Holdings has a stable customer base spread across commercial, residential and government customer classes. In the 2014 -2018 time frame the company aims to invest $5.8 billion in its Power Delivery business to further strengthen its existing infrastructure. We believe the systematic investment plans will ensure reliability of its services, enhance customer satisfaction and make it capable to efficiently its expanding customer base. The current dividend yield of the company is 5.25%, much higher than the industry average of 2.33%.
-Pepco Holdings Inc. is scheduled to announce its fourth quarter 2013 financial results on Feb 28.
Sempra Energy (SRE)
San Diego, Calif. based Sempra Energy is involved in the sale, distribution, storage and transportation of electricity and natural gas. Sempra’s two regulated Californian utilities provide services to more than 20 million natural gas and electricity customers.
Sempra Energy currently has a $22.69 billion market capitalization and carries a Zacks Rank #3 (Hold).The Earnings ESP for the fourth quarter 2013 is +1.00%.
Sempra Energy’s varied businesses spread across the country act as a buffer against any region-specific risk. The company is presently focusing on regulated generation and investing considerably to strengthen its power generation from alternate sources. We believe electricity demand from its wide customer base and initiatives to strengthen its existing operation will enable the company to register strong earnings going forward. The current dividend yield of the company is 2.71%, higher than the industry average of 2.45%.
-Sempra Energy is scheduled to announce its fourth quarter 2013 financial results on Feb 27.
What Lies Ahead?
The need for uninterrupted electric and water supply is the most fundamental strength of the industry. Government regulations and new pollution standards for power generation will continue to change the generation mix. But the bottom line is the demand for utilities can never turn obsolete.
Investors looking forward to a regular return on investment (utilities are the most consistent to pay regular dividends) and stable earnings performance could do well to explore the Utility space. A sneak peek at the space for some possible winners backed by a solid Zacks Rank and a positive Zacks Earnings ESP could be a great idea for investors to gain from this earnings season.