3 Utilities To Add Before Curtains Drop On Q4 Earnings

Nearly 97% of the S&P 500 members have already revealed their earnings results. Before the curtains finally fall, we draw the investors’ attention to a highly regulated and defensive utility sector. Utilities like the little red caboose have been the sturdy and reliable performers in all kinds of markets.

Utilities are a mature sector contributing nearly 5% of the S&P 500 market cap. Domestic focus and no available alternative for the services rendered are the driving force of this sector. In addition, an improving U.S. economy and extreme weather conditions act as tailwinds.

Rising industrial and commercial activities are a function of a robust economy. These activities inevitably require more power. Adding fuel to it is the declining unemployment rate across the country. A U.S. Bureau of Labor Statistics report indicates that the unemployment rate has come down to 5.7% in Jan 2015 from 6.6% in Jan 2014.

The U.S. Energy Information Administration (EIA) projects electricity sales to commercial customers to increase 1.3% in 2015 and 0.5% in 2016. Sales to industrial customers are expected to rise 1.8% in both 2015 and 2016. While residential demand is expected to decline 0.4% in 2015 (due to less extreme weather conditions), it is projected to increase 0.9% in 2016.

On the back of rising demand, the EIA forecasts U.S. electricity generation to increase by an average of 1.0% in 2015 and 0.9% 2016. The average electricity rates across the U.S. are also likely to increase in 2015. The combination of higher sales and unit prices makes a strong case for the utilities in 2015.

The drop in oil prices in 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 for the U.S. investors.

The latest report from the International Monetary Fund (IMF) shows that the U.S. economy will improve in excess of 3% in the 2015-2016 time frame. The improvement, as per IMF, will be driven by lower oil prices, more moderate fiscal adjustment and continued support from an accommodative monetary policy. The latest stance from the Federal Reserve does not raise the alarm bells for an immediate interest rate hike.

The utility sector earnings in the fourth quarter 2014 are expected to grow at 11.4% on the back of a 4.9% improvement in total revenues. In comparison, the S&P 500 group earnings are expected to improve 6.4% on 1.5% revenue growth.

Given the uncertain markets abroad, focusing on the utility stocks, which have consistent dividend payment histories and share buyback programs, is a prudent step.

How to Select the Right Stocks?

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 high probability 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 three utility stocks that are currently equipped with the right combination of elements to post an earnings beat.

ITC Holdings (NYSE:ITC) has a Zacks Rank #3 and an Earnings ESP of +2.00%. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is at 50 cents.

ITC Holdings has delivered positive earnings surprises in three out of the trailing four quarters with an average beat of 1.72%. The long-term earnings growth is pegged at 11.2%.

Based in Novi, MI, ITC Holdings engages in electricity transmission in the United States. It owns and operates high-voltage transmission facilities in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas, and Oklahoma. The company has the ability to serve a combined peak load in excess of 26,000 megawatts (MW).

ITC Holdings is scheduled to announce its fourth quarter 2014 financial results before the market opens on Feb 26.

Pattern Energy Group (NASDAQ:PEGI) has a Zacks Rank #3 and an Earnings ESP of +420%. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is 5 cents, 129.4% higher than the year-ago number.

Pattern Energy Group’s long-term earnings growth is pegged at 15.0%. The current dividend yield is 4.75%, higher than the industry average of 2.14%.

Based in San Francisco, CA, Pattern Energy is an independent power company, having 12 wind power projects in the United States, Canada and Chile. The company has a capacity of 1,636 MW. Nearly 92% of the electricity produced is sold under long-term power sale agreements.

Pattern Energy Group is scheduled to announce its fourth-quarter 2014 financial results before the market opens on March 2.

UIL Holdings (NYSE:UIL) has a Zacks Rank #3 and an Earnings ESP of +3.23%. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is 62 cents per share.

UIL Holdings has delivered positive earnings surprises in two of the last four quarters. The long-term earnings growth is pegged at 5.78%. The current dividend yield of the company is 4.06%, higher than the industry average of 2.14%.

Based in New Haven, CT, UIL Holdings is a diversified energy delivery company serving approximately 700,000 electric and natural gas utility customers in 67 communities across Connecticut and Massachusetts.

UIL Holdings Corporation is scheduled to announce its fourth-quarter 2014 financial results after the market closes on Feb 26.

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 3.3% in 2015 compared with a 2.2% rise for the S&P 500. So, if you’re confused about where to invest, the utilities are always a safe bet.

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