Can Southern Co. (SO) Keep The Earnings Streak Alive In Q2?

We expect electric utility firm Southern Company (NYSE:SO) to beat expectations when it reports second-quarter 2016 results before the opening bell on Wednesday, July 27.

In the preceding three-month period, the Atlanta-based service provider delivered a positive earnings surprise of 9.43% on lower costs. In fact, Southern Company has outpaced the Zacks Consensus Estimate in all of the past four quarters with an average beat of 4.49%.

Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Southern Company is likely to beat earnings in the to-be-reported quarter because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP for this company stands at +2.94%. This is because the Most Accurate estimate stands at 70 cents, whereas the Zacks Consensus Estimate is pegged lower at 68 cents. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Southern Company carries a Zacks Rank #3 (Hold) which, when combined with a positive ESP, makes us confident of an earnings beat.

Note that stocks with Zacks Ranks #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. On the other hand, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

What is Driving the Better-Than-Expected Earnings?

A leading utility holding entity in the U.S., Southern Company dominates the power business across the Southeast. With a strong rate base growth and constructive regulation, the firm generates steady earnings.

In particular, Southern Company’s commercial sales has been strong over the past five quarters, culminating in a 0.8% growth (weather adjusted) in the first quarter. The momentum is expected to continue in the Apr-Jun period too.

We are also encouraged by the improving ISM Manufacturing Index, which rose for the second straight month in June to its highest level since Feb last year. Signaling an expanding industrial production outlook, this bodes well for Southern Company with approximately a third of the utility’s total retail sales coming from industrial customers.

Finally, we appreciate Southern Company’s cost reduction initiatives as seen in the previous quarter when its total operating expenses decreased around 6% year over year. We expect a similar trend in the to-be-reported quarter, leading to earnings outperformance.

Other Stocks to Consider

Southern Company is not the only utility looking up this earnings season. Here are some companies from the space which, according to our model, also have the right combination of elements to post an earnings beat this quarter.

American Water Works Company Inc. (NYSE:AWK) has an Earnings ESP of +5.56% and a Zacks Rank #2. The utility is expected to release earnings results on Aug 3.

DTE Energy Co. (NYSE:DTE) has an Earnings ESP of +2.20% and a Zacks Rank #2. The utility is anticipated to release earnings on Jul 26.

UGI Corp. (NYSE:UGI) has an Earnings ESP of +50.00% and a Zacks Rank #2. The utility is likely to release earnings on Aug 1.