The utility sector continues with its steady run of performance, thanks to its domestic focus that insulates it from international turmoil. The regulated nature of operation also ensures steady earnings. We do not have any viable alternative for water and electricity, which keeps demand alive even during economic downturns. However, there is no fear of that at the moment as U.S. economic conditions are looking up on the heels of a number of positive data read-outs.
Utilities need to approach the capital markets to arrange for funds. In this situation, the prevailing low interest rate environment is a big boon for the capital intensive industry. Despite a slight rise in interest by the Fed last December, the interest rate has held steady this year. Choppy recovery in overall market conditions has come in the way of a lift-off time and again.
The recovery in oil prices from historic lows began from February this year and continued through the better part of June, but prices have started to drop again wiping out some of the gains registered over this period. The uncertainties in the global markets would further drive investors to the safety of utility stocks. These primarily domestic-oriented regular dividend payers can be a smart choice for investors this earnings season.
Q2 earnings from the Utility sector are expected to jump 20.9% while revenues are expected to be up 2.4% from the same period last year. The Dow Jones Utility Average (DJU) has appreciated 24.7% year to date (as of July 22, 2016) compared with the S&P 500’s return of 6.4% over the same time frame.
S&P 500 Picture to Date
The second-quarter 2016 earnings season is well underway, with nearly 25% of the S&P 500 members having released their earnings as of Jul 22. Total earnings are down 1.1% from the same period last year on 2.6% lower revenues. Overall, total S&P 500 earnings are expected to be down 3.4% on 0.5% lower revenues, with growth in negative territory for 9 of the 16 Zacks sectors.
Given the evolving second-quarter 2016 earnings picture, let’s focus on the mature Utility sector.
Selecting the Right Ones
Picking the right stocks to add to your portfolio could appear to be a daunting task given the wide range of companies in the utility space. One way to narrow the selection process during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP is usually an indication 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%.
Applying the above strategy, we have selected five utility stocks that have a greater possibility of posting an earnings beat in the coming days.
UGI Corporation (UGI)
UGI Corporation supplies, stores, and markets energy products and related services to its global and U.S.-based customers.
UGI Corporation has a Zacks Rank #2 along with an earnings ESP +50.0%. The company has a long-term earnings growth expectation of 6.87% and a forward P/E of 23.09. It has delivered an average positive earnings surprise of 6.91% over the trailing four quarters.
The company is expected to report third-quarter fiscal 2016 results after the market closes on Aug 1.
DTE Energy Company (NYSE:DTE) (DTE)
DTE Energy Company along with its subsidiaries is engaged in regulated and unregulated energy businesses. DTE Energy is directing capital investments toward renewable generation, utility infrastructure and environmental compliance assets. In addition, improving economic conditions in its service territories are also spurring demand for utility services.
DTE Energy has a Zacks Rank #3 along with an earnings ESP +1.11%. The company has a long-term earnings growth expectation of 5.80% and a forward P/E of 20.08. It has delivered an average positive earnings surprise of 2.34% over the trailing four quarters.
The company is expected to report second-quarter 2016 results before the market opens on Jul 26.
WEC Energy Group (WEC)
WEC Energy Group 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. The company generates nearly 99% of its earnings from regulated operations, which provide excellent earnings visibility.
WEC Energy Group has a Zacks Rank #3 along with an earnings ESP +1.82%. The company has a long-term earnings growth expectation of 6.23% and a forward P/E of 22.36. It has delivered an average positive earnings surprise of 4.38% over the trailing four quarters.
The company is expected to report second-quarter 2016 results before the market opens on Jul 27.
Southern Company (NYSE:SO) (SO)
Southern Company is one of the largest generators of electricity in the U.S., serving both regulated and competitive markets across the southeastern U.S. Southern Company’s decision to expand its natural gas operation through the inorganic route is a well thought out strategy given the transition of U.S. utilities to use natural gas instead of coal for producing electricity.
Southern Company has a Zacks Rank #3 along with an earnings ESP +2.90%. The company has a long-term earnings growth expectation of 4.10% and a forward P/E of 19.18. It has delivered an average positive earnings surprise of 4.49% over the trailing four quarters.
The company is expected to report second-quarter 2016 results before the market opens on Jul 27.
Exelon Corporation (NYSE:EXC) (EXC)
Exelon Corporation along with its subsidiaries has operations in 48 states and the District of Columbia in the U.S., along with Canada. The company will invest nearly $23 billion in the 2016-2018 time period to further strengthen its existing infrastructure and expand its renewable and fossil fuel generating capacity.
Exelon has a Zacks Rank #3 along with an earnings ESP +1.79%. The company has a long-term earnings growth expectation of 4.09% and a forward P/E of 14.79. It has delivered an average positive earnings surprise of 8.27% over the trailing four quarters.
The company is expected to report second-quarter 2016 results on Aug 3.
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UGI CORP (UGI): Free Stock Analysis Report
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