3 Utility Stocks to Light Up Your Portfolio - Earnings ESP

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Utility services undoubtedly play a vital role in shaping the economic progress of a nation, as an abundant supply of power at a reasonable price keeps the wheels of development rolling. Demand for industrial, commercial and residential utility services sees an upward spike when a country is in good economic health.

Regulated operations like the utilities also ensure a steady stream of returns. This is particularly important when the broad geographical picture is fraught with danger. Instability brings in insecurity which drives away business. Since the global economies are interlinked, the ongoing crisis in Ukraine and rising possibility of imposing greater sanctions on Russia could adversely impact the European markets. Russia does most of its trade with the European Union (EU). Now if EU spurns gas imports from Russia (EU imported 160 billion cubic meters of gas in 2013) it could adversely impact the economy of the region.

If we add to this the increasing tension in the Gaza strip and the instability and ongoing crisis in Syria, Iraq and Egypt, the picture gets even murkier. Investors will certainly shy away from these troubled areas and rather look for stable returns. The U.S. utility stocks would therefore be a safe bet for risk-averse investors.


Besides offering steady returns, utilities diligently share profits with their shareholders through regular dividend payments. This was even true during the height of the latest economic crisis. This ability adds to, in no little measure, the perceived defensiveness of the sector.

The only major headwind that we see for electricity generating utility companies is the implementation of stricter environmental legislations. Environmental compliance will necessarily flare up costs for the utilities, particularly for those relying on coal-fired generation. Recently, the U.S. Environmental Protection Agency (EPA) has proposed a Clean Power Plan, the primary objective of which is to cut down emissions from existing power plants by 30% over the 2005 to 2030 time frame.

The utilities are however not to be cowered by these regulations. They have gradually shifted their emphasis towards natural gas and alternative resources to produce power. Producers using coal are also installing pollution control measures to lower emissions. Efforts are being made to harness new eco-friendly sources to generate electricity and lower the carbon footprint.

Given the advantages of investing in the Utility space, let's dig into a few utility companies that are expected to beat earnings this season.

How to Pick the Right Stocks?

With a large number of operators in the utility space, selecting the correct stocks may appear to be a daunting task. This is where we fall back on our proprietary methodology. It's fairly simple - stocks with the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Zacks Earnings ESP are the ones that are likely to surpass earnings estimates in the upcoming announcement.

Earnings ESP is our proprietary methodology for determining stocks that have high probability of delivering earnings surprises 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%.

Here are three utility stocks that are currently equipped with the right combination of elements to post an earnings beat.

Ameren Corporation ( AEE ) has a Zacks Rank #1 and an Earnings ESP of +14.04%. The Zacks Consensus Estimate for the company's second-quarter earnings is 57 cents per share, reflecting an expected year-over-year gain of 30.30%.

Ameren Corporation has a history of beating earnings estimates. The company delivered positive earnings surprises in three out of the trailing four quarters with an average beat of 18.69%. The long-term earnings growth is pegged at 7.8%. The current dividend yield of the company is 4.02%, much higher than the industry average of 2.01%.

St. Louis, MO based Ameren Corporation along with its units, generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois. The company delivers electricity to more than 2.4 million customers and natural gas to about 0.9 million customers. The company is scheduled to announce its second quarter 2014 financial results on Aug 5.

Consolidated Edison, Inc. ( ED ) has a Zacks Rank #2 and an Earnings ESP of +9.26%. The Zacks Consensus Estimate for the company's second-quarter earnings is 54 cents per share, in line with the year-ago number.

Consolidated Edison too has beaten earnings estimates fairly regularly. The company delivered positive earnings surprises in three out of the trailing four quarters with an average beat of 4.08%. The long-term earnings growth is pegged at 2.75%. The current dividend yield of the company is 4.42%, higher than the industry average of 2.01%.

New York City based Consolidated Edison, Inc. is a diversified utility holding company with subsidiaries engaged in both regulated and unregulated businesses. Through its two regulated subsidiaries, Consolidated Edison Company of New York (CECONY) and Orange and Rockland Utilities (O&R), the company supplies electricity and gas to nearly 4.8 million consumers. The company is scheduled to announce its second quarter 2014 financial results on Aug 7.

Edison International ( EIX ) has a Zacks Rank #2 and an Earnings ESP of +2.41%. The Zacks Consensus Estimate for the company's second-quarter earnings is 83 cents per share, which reflects an expected year-over-year gain of 5.54%.

The company's earnings surprise history looks unblemished over the trailing last four quarters, with an average beat of 17.92%. The long-term earnings growth is pegged at 2.63%. The current dividend yield of the company is 2.51%, higher than the industry average of 2.01%.

Rosemead, CA based Edison International generates and supplies electricity through its subsidiaries. Edison International's distribution network of nearly 53,000 miles of overhead lines and 37,000 miles of underground lines and 800 distribution substations in California help it to serve 5 million customers. California incidentally has a constructive regulatory environment with much emphasis given on renewable generation. The company is scheduled to announce its second quarter 2014 financial results on Jul 31.

What Lies Ahead?

Government regulations and new pollution standards for power generation will continue to alter the generation mix. But the bottom line is that the demand for utilities can never turn obsolete.

In the first quarter of 2014, earnings for the Utility sector were up 18.0% on 11.2% higher revenues. The Utilities are again expected to record a double-digit earnings growth rate of 11.7% this season.

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

AMEREN CORP (AEE): Free Stock Analysis Report

CONSOL EDISON (ED): Free Stock Analysis Report

EDISON INTL (EIX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Earnings

Referenced Stocks: EU , AEE , ED , EIX

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