Southern Co Poised To Grow Amid Higher Financing Costs

We issued an updated research report on leading energy utility firm, Southern Company (NYSE:SO) ,on Aug 11, 2016. The company’s returns are among the highest in the industry. At the same time, it maintains its position as a low-cost provider of electricity with superior customer satisfaction levels.

However, the challenging economic environment, higher finance costs and increased spending levels may hamper Southern Company's results in the next few quarters.. This is reflected in the company’s Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Southern Company is one of the largest electric utility holding companies in the U.S., and is a premier energy company in the Southeast. This region is considered to be an advantageous one owing to its higher-than-average natural population growth, strong and diverse regional economy, constructive regulation and comparatively tight power markets. These characteristics provide a solid base for Southern Company’s regulated business, which is expected to make up roughly 90% of its consolidated earnings over the next few years.

It is to be noted that Southern Company recently reported second-quarter 2016 earnings per share (excluding certain one-time items) of 74 cents, ahead of the Zacks Consensus Estimate of 69 cents and higher than the year-ago adjusted profit of 71 cents. Moreover, the company has significantly bolstered its position in the rapidly growing distributed infrastructure solutions market with its recent acquisition of utility management technology firm, PowerSecure International. Also, the buyout of energy services holding company AGL Resources (NYSE:GAS) Inc. has helped it augment the supply of cheap natural gas supply to its power plants. The company’s focus on natural gas might also help it to reduce its operating cost to a large extent.

However, as is the case with other electric utilities, Southern Company has been experiencing flat-to-low electricity sales over the last few years due to the impact of fluctuating weather conditions on overall consumer demand. Additionally, given that approximately one-third of the company’s total retail sale comes from industrial customers, a sluggish economy has been affecting the fortunes of Southern Company more than other utilities that are less dependent on the industrial component.

Additionally, the company’s borrowings to fund recent purchases – like AGL resources and PowerSecure – has increased its debt levels. This, in turn, has led to an increase in the requirement of significant cash flows for repayments.

Stocks to Consider

Some better-ranked players in the energy space include Sasol Ltd. (NYSE:SSL) , Murphy USA Inc. (NYSE:MUSA) and North Atlantic Drilling Limited (NYSE:NADL) . All these stocks sport a Zacks Rank #1 (Strong Buy).