4 Stocks to Watch From the Prospering Electric Power Industry
The Zacks Utility – Electric Power industry stocks have been transitioning toward clean sources of fuel and focusing on lower carbon emissions. The introduction of Inflation Reduction Act 2022 will support the industry’s transition toward clean energy sources to produce electricity. Utilities are also focused on strengthening the grid as well as transmission and distribution infrastructure. The huge infrastructure of the utilities faces the impact of the hurricane season each year. Infrastructure enhancement around the year increases the resilience of the entire system, reduces outages and allows operators to restore power quickly for customers affected by storms.
American Electric Power Company AEP, with a large investment to expand renewable operations, widespread transmission and distribution assets and well-chalked-out capital investments to boost infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities worth adding to your portfolio include Xcel Energy XEL, Consolidated Edison ED and PPL Corporation PPL.
About the Industry
The Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to customers. A substantial portion of utilities’ earnings is generated from regulated operations. Unless there is any major weather variation or unprecedented incidents, such as the coronavirus pandemic, demand for the services provided by utilities remains more or less steady, regardless of economic cycles. A clear transition is evident in this industry, with more companies declaring zero-emission goals on their own. Research and development over the years has resulted in a substantial decline in the cost of setting up utility-scale renewable power projects, aiding in the reduction of emissions. However, the ongoing increase in interest rates is a concern for capital-intensive utilities.
3 Electric Power Industry Trends to Watch Out For
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward cleaner sources of energy to produce electricity. Per EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 21% in 2022 to 24% in 2023 and 26% in 2024 as a result of the continuing addition of solar and wind-generating capacity. EIA expects total solar, wind generation and battery storage addition of 57 GW and 59 GW to be added in 2023 and 2024, respectively. The expansion of renewable energy continues to eat into the share of coal in electricity generation. EIA expects coal contribution to electricity generation to fall from 20% in 2022 to 18% in 2023 and further to 17% in 2024. The passage of Inflation Reduction Act (IRA) will support and accelerate the utilities’ transition toward clean energy sources. IRA has removed the uncertainties relating to federal incentives provided for renewable sources usage. The Act entails an opportunity for a wide range of low-cost clean energy solutions in a predictable way for a long time and will create earnings visibility.
Demand for Electricity Stable: Per EIA, 2023 electricity consumption in the United States can drop 1% in 2023 and rise more than 1% in 2024, EIA believes that the expected drop in demand for electricity in 2023 is due to a milder summer forecast that would lead to less requirement for cooling. Despite the expected drop in consumption, the utilities will continue to add new renewable energy assets to the total generation portfolio.
Ongoing Interest Rate Increase is a Concern: Utilities, to maintain, upgrade and expand operations, approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. But multiple rate hikes in 2022 pushed up interest rates. In February 2023, the Federal Reserve again raised interest rates by 25 percentage points, taking the benchmark rate a range of 4.50%-4.75%. This is the eighth increase in interest rates since March 2022, with more expected to come in 2023.
The increasing interest rates are a concern for capital-intensive utilities in the United States as these will push up capital servicing costs substantially from the current levels. U.S. utilities are currently spending a substantial amount on developing an advanced electricity network. Utilities might try to pass on the burden of increasing borrowing costs to customers but the necessary increase in rates might not get approved by the commission. In such a scenario, the utilities will need to digest the extra expenses, which can lower their profitability and make them less attractive to investors interested in the utility space.
Zacks Industry Rank Indicates Positive Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. The 59-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #92, which places it in the top 37% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Since March 2022, earnings estimates for 2023 have moved up 1.9%. Looking at the upward earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential.
Before we present a few Utility - Electric Power stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and current valuation.
Industry Outperforms S&P 500 and Sector
The Utility Electric Power industry has outperformed the Zacks S&P 500 and its own sector over the past 12 months. The industry has declined 0.6%, narrower than its sector’s drop of 1% and the Zacks S&P 500 composite’s decline of 10% in the same period.
Price Performance (One year)
Industry's Current Valuation
On the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) TTM, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 18.96X compared with the S&P 500’s 12.47X and the Utility sector’s 21.46X.
Over the past five years, the industry has traded as high as 19.4X, as low as 10.42X and at the median of 13.02X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs)
Industry EV/EBITDA TTM vs Sector (5yrs)
4 Electric Power Industry Stocks to Focus On
Consolidated Edison, Inc.: New York-based Consolidated Edison. through its subsidiaries engaged in regulated electric, gas and steam delivery businesses. The company has a capital expenditure plan of $15.7 billion for the 2022-2024 period. ED’s current dividend yield is 3.3%,which is better than the Zacks S&P 500 Composite group’s average of 1.57%. The Zacks Consensus Estimate for Consolidated Edison’s 2023 earnings has gone up by 0.6% in the past 60 days. ED’s long-term (three to five years) earnings growth is pegged at 2%. The ED stock has gained 7.3% over the past three months. Consolidated Edison currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ED
American Electric Power Company Inc.: Columbia, OH-based American Electric Power generates and distributes electricity. AEP has plans to invest $40 billion in different projects in the 2023-2027 time period. AEP’s current dividend yield is 3.51%. The Zacks Consensus Estimate for American Electric Power’s 2023 earnings has gone up by 0.6% in the past 60 days. AEP’s long-term earnings growth rate is pegged at 6.2%. The AEP stock has gained 7.2% over the past three months compared with its industry’s rally of 3.9%. American Electric Power currently has a Zacks Rank #3 (Hold).
Price and Consensus: AEP
Xcel Energy: Minneapolis, MN-based Xcel Energy provides electricity and natural gas to customers in eight states. Xcel Energy aims to spend $29.5 billion during the 2023–2027 time frame to strengthen and expand its transmission, distribution, electric generation and renewable projects. XEL’s current dividend yield is 2.8%, The Zacks Consensus Estimate for Xcel Energy’s 2023 earnings has gone up by 0.3% in the past 60 days. XEL’s long-term earnings growth is pegged at 6.6%. XEL stock has gained 6.8% over the past three months. Xcel Energy currently has a Zacks Rank #3.
Price and Consensus: XEL
PPL Corporation: Allentown, PA-based PPL delivers electricity and natural gas to its customers in the United States. PPL has a five-year capital expenditure plan from 2022 to 2026 of $12 billion and plans to invest another $15 billion through 2030. PPL’s current dividend yield is 3%. The Zacks Consensus Estimate for PPL Corp.’s 2023 earnings has gone up nearly 0.6% in the past 60 days. The PPL stock has gained 10.4% over the past three months. PPL currently has a Zacks Rank #3.
Price and Consensus: PPL
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