We never would have guessed utilities would underperform amidst a pandemic-driven recession. They are trailing the market by 500bps YTD and by 735bps from the market peak. Other defensive, yield sectors like Staples and REITs are underperforming too. The market is very narrowly focused on growth/momentum or recovery plays. For several years, utilities traded at lofty 10-20% premiums driven by long-term favorable trends: 1) high single digit total returns amidst a low interest rate, low growth economy; 2) earnings stability through the economic cycle; and 3) ESG friendly growth in renewables and in electrification. Our conviction in these LT trends is even higher today than before while valuation is now at a 10% discount to the market (2021E) and the yield spread to bond yields is at a record. The Presidential election is a potential catalyst as utilities seem less impacted than others if the Democrats win. As the market focuses past the U, V or W recovery to the next letter, we think utilities will meaningfully benefit.
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We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 4% WoW, but down 9% YoY for the week-ended 5/23 – the worst YoY mark since we started tracking this data in mid-March. Relative to the 4-year average it wasn’t much better – demand was down 8%, which was close to the worst we’ve seen. Mild weather likely isn’t helping, but we’re becoming increasingly concerned on this trend. Total degree days (HDDs and CDDs) fell by nearly 30% WoW. Heating degree days were down 21% versus last year and 6% versus normal when looking across the U.S. in aggregate. Similarly, cooling degree days were down 23% versus last year and 4% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was down 1% WoW and down 6% YoY for the week-ended 5/16. Relative to the 4-year average, demand was down 9% – the worst reading since we started tracking this data in mid-March. The flattish WoW print is less impressive as we move towards the higher-load months. While many states are starting to reopen and some believe we have bottomed, power demand may not be out of the woods yet, as the declines have ticked up to the high-single digits on a YoY-basis, after previously hovering around the mid-single digits. Weather is beginning to play less of a factor in a shoulder month. Heating degree days were up 17% relative to last year and up 41% relative to normal when looking across the U.S. in aggregate.
Most utilities reaffirmed their 2020 guidance and nearly all reaffirmed their LT growth rate outlooks. Specifically, 21 companies reaffirmed 2020, 7 cut their 2020, and 3 suggested a potential future cut. Our bottom-up 2020 and 2021 outlooks show 2.7% and 6.6% growth, respectively, modestly down from prior estimates of 4.0% for 2020 but up from 6.0% for 2021. Mild Q1 weather and recession-driven weakness in C&I sales are being offset by higher-margin residential sales boosts and accelerated cost cutting. There is risk in the event of a muted recovery, but we leave earnings season more confident utility fundamentals can hold up through this crisis. The stocks seem lost between a momentum stock bubble and a preference for recovery plays, but we think investors will come back to utilities as they refocus past the virus cycle.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 2% WoW and down 6% YoY for the week-ended 5/9. Similarly, demand was down 6% relative to the 4-year average. This was the best WoW result and only the second positive move, since we started tracking the data in mid-March. That said, we are moving towards the higher-load months where this should be expected. On a YoY-basis and versus the 4-year average, demand fell 6%. This is consistent with the recent run-rate and an improvement from the prior week’s low that showed an 8% decline YoY and versus the 4-year average. Heating degree days were up 49% relative to last year and up 30% relative to normal when looking across the U.S. in aggregate. Everywhere except the West coast saw lingering colder weather before summer kicks off.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was flat WoW and down 8% YoY for the week-ended 5/2. Similarly, demand was down 8% relative to the 4-year average. While the weekly moves have remained stable, this was the largest decline relative to last year and the 4-year average that we have seen since we started tracking the data in mid-March. The previous high was a 6% decline YoY and 7% decline versus the 4-year average in early April. On average the declines YoY and versus the 4-year average have tracked at ~5%. That said, we are in a shoulder period and weather was more mild, so we’re not seeing a cause for additional concern yet. Heating degree days were down 22% relative to last year and down 16% relative to normal when looking across the U.S. in aggregate.
Our thesis on utilities investing is to buy low and sell high. For the last two years, Regulated utes have been trading at a large premium to the S&P 500 even amidst a bull market and we stayed underweight. Ironically, it has taken a bear market for the relative valuation to correct to levels that are intriguing. Utilities are underperforming the market for the year (160bps) and even more so since the Feb 19 peak (420bps). We discuss potential explanations below (none of which are compelling), but our sense is utilities are lost between the market’s preference for momentum stocks (tech and health care) or recovery plays (cyclicals, discretionary). While this may continue, we think the best time to buy utilities is when they are cheap and they are now. They are not only trading at a discount on 12-month forward earnings, but also on 2021E when a recovery is better embedded.
After market on 4/30, EIX reported 1Q20 EPS of $0.63, below consensus of $0.80 but near our $0.66e. EIX affirmed its 2020 guidance of $4.32-4.62, though the drivers are moving around, given COVID-19 impacts and wildfire costs. The CPUC’s regulatory mechanisms, include sales decoupling and various memorandum accounts, which allow certain costs to be tracked for eventual recovery. EIX will provide more detail on the drivers this summer. EIX still plans to issue $710M of equity this year, but it has flexibility. We would like to see EIX issue this equity sooner rather than later since it’s been an overhang and could be more difficult as the year goes on with PCG’s large BK exit financing ($9B of equity) and the fall wildfire season. We think EIX’s ~30% discount to peers is extreme, as equity needs are modest and CA’s regulatory framework limits downside from COVID-19 and financial liability from future wildfires. We reiterate our Outperform.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was down 1% WoW and down 4% YoY for the week-ended 4/25. Similarly, demand is down 5% relative to the 4-year average. This is very similar to the prior week and continues to show demand decline stabilization. The average decline has been hovering around 5% YoY. Weather also once again helped last week. Heating degree days were up 73% relative to last year and up 14% relative to normal when looking across the U.S. in aggregate. The majority of regions saw HDDs both above last year and normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
So far in 2020, mild weather has been a bigger earnings impact than the virus. Q1 degree days were 15-20% below average throughout most of the US. But all the focus will be the impact of the virus and implications for 2020 guidance. On the right, we show which companies we think will reaffirm 2020, those on the bubble, and those likely to cut or guide down. Companies that can reaffirm typically have a lot of levers to pull in their budget/costs or have constructive regulatory mechanisms like decoupling or bad debts trackers. Managements may have different base assumptions on recovery timelines so we will be very interested to pin those down. Finally, we value utilities off 2021/2022 earnings so we will care most about any issues with the virus today that could somehow impact L-T results – so far, we see little lingering impact.
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