From Winter Storm Uri to Hurricane Ida, extreme weather is the emerging big story for utilities in 2021, just as the pandemic was last year. And now as then, well-executed responses are absolutely essential.
New Orleans-based Entergy Corp (NYSE: ETR) arguably has the most on the line at this time. The Portfolio section discusses its prospects, as well as those of other storm-hit utilities.
My other big theme this month is income. Borrowing rates for Utility Report Card companies are still near multi-generation lows, which means slim pickings for fixed income. But the Feature article shows there are still big, safe yields in less obvious places.
“Unpacking” earnings for key details became a popular catch phrase for analysts during Q2 reporting season. And that’s exactly what I do in this August issue of CUI: Utility Report Card highlights vital signs for the 90 percent or so of coverage universe companies that have turned in numbers and updated guidance, while the Portfolio section focuses on my top recommendations.
I dig deep into results to answer two critical questions. First, are companies still moving in the right direction with strategic plans and balance sheet health? And second, are business developments adequately reflected in share prices, meaning are there opportunities for upside or should we be moving on?
America’s electric utilities are on track for a 10th consecutive year of record capital spending in 2021, according to numbers compiled by the Edison Electric Institute.
That’s closely followed by the $70 billion plus the country’s five largest communications companies plan to spend this year, rolling out 5G wireless and expanding fiber broadband connections. And while pipeline construction remains highly contentious in many places, spending on gas and water systems also remains at elevated levels.
Bloomberg New Energy Finance reports 5.8 gigawatts of operating US solar generation is now co-located with energy storage as of May 2021. And there’s another 28 GW combined with 39 GW hours of battery storage in some stage of permitting and securing financing for start up in the next couple years. Including storage capacity at facilities is the biggest step yet tackling what’s still solar energy’s biggest hurdle to growth, intermittency. And as battery technology develops, the industry will near its ultimate goal of making solar plus storage actually dispatchable to grid operators.
What a difference a few months makes in a momentum driven stock market! Earlier this year, it was our renewable energy stocks benefitting from frenzied buying of anything investors deemed to be “green,” with prices reaching generous profit-taking levels.
Now it’s our oil and gas pipeline stocks that investors can’t get enough of. And in contrast, Conservative Focus stock Brookfield Renewable Partners (NYSE: BEP) and Aggressive Focus stock Atlantica Yield (NSDQ: AY) are trading at positively attractive valuations. Even best in class wind and solar company NextEra Energy (NYSE: NEE) is in buying territory.
$274 billion: That’s the staggering sum President Biden’s infrastructure plan would allocate to US utilities, as investment in new transmission lines, renewable energy deployment and electrification of transportation. Bloomberg Intelligence estimates that’s enough to add at least 2 percentage points to utility earnings growth rates. Getting that into rate base would require the assent of Congress as well as state regulators. But even $100 billion of fresh tax incentives and other subsidy would provide a huge lift for earnings and dividends, and ultimately share prices.
For the 17th year since 1984, the Dow Jones Utility Average ended the month of January in the red (-1.4 percent). And utilities have dropped further, with the DJUA down slightly less than 5 percent for the first 9 weeks or so of 2021.
The good news: 10 of those years, utilities ended higher. And only in 2008, 2002, 2001 and 1994 were they meaningfully lower.
Most Utility Report Card companies report their Q4 earnings and update guidance later this month. But what I’ve already seen so far provides plenty of reason to be confident in best in class essential service businesses this year.
That definitely includes the 17 recommendations for which we now have numbers. As I highlight in the Portfolio discussion this month, more than a few of them have also proven to be reliable bellwethers for their respective sectors. And both Conservative Focus stock BCE Inc (TSX: BCE, NYSE: BCE) and Aggressive Focus stock Enel SpA (Italy: ENEL, OTC: ENLAY) are good examples.
For the most part, 2020 was a year when winning stocks kept moving higher. Underperformers remained stuck in neutral or worse.
Renewable energy companies’ abrupt conversion from value to momentum stocks was by far the most positive story in the Conrad’s Utility Investor coverage universe in 2020. Nine of the top ten performers owned their gains to a sharp uptick in investor enthusiasm for wind, solar, battery storage and electric vehicles.
Conversely, many other essential services companies I track are still one-third or more off their highs of last February. And the result was the largest performance gap in the history of this advisory, some 843 percentage points between the biggest winner and loser.
“Big Mo” is back in style for stocks. The result is investors continue to crowd into this year’s biggest winners while shunning underperformers, even as big blue chip averages like the S&P 500 and NASDAQ 100 set one new high after another.
In our coverage universe, momentum has been very strong since last month’s election for anything to do with renewable energy. And the result is several favorites are now ripe for taking partial profits, despite strongly bullish long-term outlooks.
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Roger's current take and vital statistics on more than 200 essential-services stocks.