The 2015 earnings releases are pouring in with nearly 76% of the S&P 500 members expected to complete releases by the end of this week. And the buzz already in the market is that of an earnings recession, thanks to the slower-than-expected improvement in the global economy, a stronger dollar, and consistent weakness in oil and gas prices. This seems to be the perfect time to take stock of the performance of the utilities, noted for their safe investment appeal.
The resilient utility sector has still much to offer to jittery investors, who are looking for steady performers amid the market turmoil. The regular dividend payment and ability to repurchase shares make them favorable choices at the moment. The top line of the utility sector is expected to decline by 2% in the fourth quarter of 2015, less harsh than a decline of 3.9% for the S&P 500.
The Federal rate hike after nearly a decade came in Dec 2015 much to the consternation of the utilities. Moreover, a warm start to the winter will not bode well for electricity and natural gas sales. Add to it a stringent regulatory climate that is coming down heavily on the age-old utilities, particularly the plants run on dirty coal.
The beginning of the New Year turned out to be a nightmare for the investors. China-led weaknesses in the international markets and continuously falling oil prices have resulted in a 5.5% decline in the value of Dow and a 6.9% fall for the S&P 500 in January. The ongoing softness in international markets and lower–than-expected job addition in Jan 2016 will create a strong case against a further interest rate hike in Mar 2016. This will definitely help the capital intensive utility operators.
Per a U.S. Energy Information Administration (EIA) report, retail sales of electricity to the residential sector are expected to fall by 0.5% year over year during 2016. However, the EIA forecasts that retail electricity sales to the commercial sector will rise by 0.9% and 1.1% in 2016 and 2017, respectively. In addition, U.S. industrial sector sales are expected to increase by 1.1% in 2016 and 0.4% in 2017.
Despite the planned reduction of coal-powered units in electricity generation, the EIA forecasts total U.S. electricity generation in 2016 to average 11.3 terawatt hours per day, 0.4% higher than 2015 generation. The EIA also expects total electricity generation to grow by an additional 1% in 2017. These are positive signs for the defensive utilities and give a measure of certainty to investors about their ongoing performance.
How to Select the Right Ones?
Given a large number of industry participants, pinpointing stocks that have the potential to beat estimates could appear to be a daunting task. But our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP .
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising 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%.
Below are four utility stocks we believe are perfectly poised to beat earnings estimates this season. As an added bonus, these stocks have the financial strength to meet further interest rate hikes without compromising on dividend payments.
Our Picks
Spark Energy (SPKE) has a Zacks Rank #1 and an Earnings ESP of +47.27%. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is 55 cents. Spark Energy has delivered a positive earnings surprise of 158.33% in the previous quarter. The stock has a current ratio of 1.26 and a dividend yield of 5.82%.
Houston, TX-based Spark Energy, along with its subsidiaries, operates as an independent retail energy services company in the United States.
Spark Energy is expected to announce fourth-quarter 2015 financial results before the market opens on Mar 29, 2016.
ONE Gas, Inc. (OGS) has a Zacks Rank #2 and an Earnings ESP of +1.41%. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is 71 cents. ONE Gas has delivered a positive earnings surprise of 7.69% last quarter. The long-term earnings growth is pegged at 6%. The stock has a current ratio of 1.79 and a dividend yield of 2.07%.
Tulsa, OK-based ONE Gas Inc. operates as a regulated natural gas distribution utility company in the United States.
ONE Gas is expected to announce fourth-quarter 2015 financial results after the market closes on Feb 17, 2016.
The AES Corporation (AES) has a Zacks Rank #3 and an Earnings ESP of +3.13%. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is 32 cents. The AES Corporation has delivered positive earnings surprises of 8.33% in the previous quarter. The long-term earnings growth is pegged at 7.39%. The stock has a current ratio of 1.11 and a dividend yield of 4.66%.
Arlington, VA-based The AES Corporation, incorporated in 1981, is a global power company. The company’s businesses are spread across five continents in 18 countries.
The AES Corporation is expected to announce fourth-quarter 2015 financial results before the market opens on Feb 24, 2016.
PG&E Corporation (PCG) has a Zacks Rank #3 and an Earnings ESP of +2.22%. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is 45 cents. PG&E Corporation’s long-term earnings growth is pegged at 4.48%. The stock has a current ratio of 1 and a dividend yield of 3.23%.
San Francisco, CA-based PG&E Corporation is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company. The utility generates revenues mainly through the sale and delivery of electricity and natural gas to customers.
PG&E Corporation is expected to announce fourth-quarter 2015 financial results before the market opens on Feb 18, 2016.
To Sum Up
Despite the market choppiness since the beginning of the year, the Dow Jones Utility Index (DJU) has shown signs of gains. The utility index added 7.8% year to date to close at $622.77. The extensively regulatory nature of the utilities provides visibility to the earnings stream and assures a steady performance over a longer period. We believe investing in these defensive stocks will lend a much-needed balance to a portfolio now.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
ONE GAS INC (OGS): Free Stock Analysis Report
AES CORP (AES): Free Stock Analysis Report
PG&E CORP (PCG): Free Stock Analysis Report
SPARK ENERGY (SPKE): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Original Article Link
