Contractors working on photovoltaic modules at an AES solar farm in Brazil.
John Rories/Bloomberg
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Sometimes utilities stocks can feel quite drowsy, and that can be a relief when the markets get chaotic. But you should not overlook the potential for growth that can add some vigor to an already attractive sector.
The
ETF (stock ticker: XLU) returned 0.2%, including reinvested dividends, in 2022, easily surpassing
Standard & Poor’s 500‘s
17% decrease. Despite some hiccups from higher returns, which typically hurt income-oriented stocks, the sector did exactly what investors had hoped would protect their money in tough times.
And times are tough. Companies have been busy cutting their earnings estimates, as higher input prices and higher labor costs erode margins. Not the facilities. Mizuho Securities analyst Anthony Crodell expects segment earnings to grow 5% to 7% due to the regulated nature of the business. This would make it resilient, even in the event of an economic slowdown. He writes: “While it is still debated whether the economy is heading into a recession, the utilities sector has moved to a purely organized model, which we believe will make them more defensive if the economy faces a rough patch.”
Utilities are also offering some growth to go along with this stability. The rise of electric cars means that energy demand is only likely to increase in the coming years, says Reaves Asset Management CEO Jay Reham, who manages
ETF (UTES). The renewable energy hub will also benefit utilities. Because of regulations, utilities can’t make more profits from rising coal or natural gas prices. But they can earn more capital projects – and operating expenses go down because the wind and the sun are clear.
This combination of growth and security isn’t cheap, but it’s not as expensive as it sounds. The utilities are trading at about 19 times their 2023 earnings, 17 times higher than the S&P 500. But the index’s earnings are falling, which means it’s actually trading nearly 19 times – and utilities usually get a premium in the market.
Here are six with potential.
AES Corporation.
| Main data | |
|---|---|
| ribbon | AES |
| Last price | USD 20.35 |
| Change from year to date | -16 |
| P/E Ratio | 11.6 times |
| profit return | 3.10% |
Source: Bloomberg
AES Corporation.
AES offers investors a stable and regulated utility business, rapidly transitioning to renewable energy. It has become one of the world’s largest solar energy developers and is a major provider of renewable energy, solar and battery backup technologies to commercial customers, including
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The company is working to reduce coal-fired power generation, which should account for less than 10% of total energy by 2025, down from about 25%. It also owns about 59 million shares in
Fluence Energy
(see below). However, AES is trading at a huge discount on other utilities and on the S&P 500 index. RBC analyst Shelby Tucker has a $30 price target for the share, up nearly 50% from Wednesday’s close.
Edison International
| Main data | |
|---|---|
| ribbon | ninth |
| Last price | 63.39 USD |
| Change from year to date | -7% |
| P/E Ratio | 13 times |
| profit return | 4.40% |
Source: Bloomberg
California is a scary place to run a facility – and that’s what it’s made of
Edison International
(EIX) Stock is inexpensive. With wildfire season upon us, it’s easy to imagine a worst-case scenario, with the fires causing billions of dollars in damage and Edison being blamed for it. The stakes may not be as great as they used to be, says Raham. California has done a good job implementing an insurance fund to help utilities avoid big blows from the past, while utilities are getting better at managing risk. Edison’s stock is trading at about 13 times estimated 2023 earnings, discounting to peers and the market, though earnings are expected to grow about 6% annually on average over the next few years. It pays big dividends too.
energize
| Main data | |
|---|---|
| ribbon | ETR |
| Last price | USD 111.06 |
| Change from year to date | -1% |
| P/E Ratio | 16.7 times |
| profit return | 3.60% |
Source: Bloomberg
For investors interested in safety,
energize
(ETR) is as defensive as it gets, with about 85% of sales coming from organized utility operations in Arkansas, Louisiana, Mississippi and Texas. Wall Street is forecasting earnings growth of about 7% annually on average for the next few years, up from 6% previously. After hurricanes and storms in 2020 and 2021, Entergy is asking regulators to approve $15 billion in network resilience spending, giving customers more reliable power and allowing the facility to earn a return on capital spent, making it a “win-win for the company and its customers”, His price target is $123 per share, about 12% above recent levels, writes Paul Fremont, analyst at Mizhuo.
xylon
| Main data | |
|---|---|
| ribbon | EXC |
| Last price | US$44.46 |
| Change from year to date | 8% |
| P/E Ratio | 18.4 times |
| profit return | 3% |
Source: Bloomberg
Stability is worth a lot for the benefit – just ask from Chicago
xylon
(EXC). Caused by an unregulated power supply
constellation energy
(CEG) earlier this year, and that made all the difference. Prior to the separation, earnings fluctuated from year to year and the stock traded at just 12 times earnings. With Constellation gone, earnings are more stable and expected to grow 7% annually through 2025, while stocks are earning 18 times as much. Exelon could also begin to focus on improving its power transmission business with funds that would have been allocated to Constellation. “Now it’s over, the instrument has better credit metrics, and stock has a higher value,” Rami says.
Fluence Energy
| Main data | |
|---|---|
| ribbon | FLNC |
| Last price | $10.01 |
| Change from year to date | -72% |
| P/E Ratio | Unavailable |
| profit return | Unavailable |
N/A = Not applicable
Source: Bloomberg
For those who want a little risk of their investment in utilities, there is
Fluence Energy
(FLNC). The company, a joint venture between AES and
Siemens
(SIE.Germany), sells storage batteries, services and software for renewable energy generation. It went public in October at $28, but started falling when the Federal Reserve first hinted at higher rates in November. However, battery storage is one of the pillars of a sustainable energy future, enabling reliable power even when the sun is not shining and the wind is not blowing.
Canaccord Genity
Analyst Jorge Gianaricas expects Fluence to turn a profit around 2024, and generate $159 million in free cash flow by 2025. It has more than $650 million on its balance sheet.
NextEra Energy
| Main data | |
|---|---|
| ribbon | Ne |
| Last price | USD 80.38 |
| Change from year to date | -14% |
| P/E Ratio | 26 times |
| profit return | 2.10% |
Source: Bloomberg
NextEra Energy
(NEE), the S&P 500’s largest utility and a leader in renewable energy, is benefiting from immigration to Florida, where it generates most of its revenue. But the inventory has been volatile recently, due to a Commerce Department investigation into solar imports that could have resulted in fewer panels available to finish its projects. Those issues seem to be behind it, at least for now, and NextEra just did a solid second-quarter earnings report. The shares aren’t cheap — they trade at 26 times 2023 earnings, which is expensive even for utilities — but they do have a reputation as a high-quality operator, and earnings have grown an average of 8% per year over the past five years.
write to Roots at allen.root@dowjones.com
.