Momentum has no valuation ceiling while risks and uncertainties have no valuation floor. This is the story within utilities and among the market overall. A choppy Q2 due to unfavorable weather and weaker core sales growth seemed to only exacerbate this trend. A few companies appear to be re-rating on lower risk perceptions – ETR, FE, EVRG, SO, EIX, SRE – but otherwise we continue to see more divergence between the pure play safe regulateds vs those with diversified businesses or project/regulatory risk. Given our value focus, we are resigned to keep focusing on the messy ones.
Search Coverage List, Models & Reports
Search Results1-10 out of 340
It’s only been just over a month since the analyst day and as expected there was not a lot of new announcements on the Q2 call. However, the quarter was a beat and there were meaningful steps forward in advancing the LT 6%-8% growth picture: NEE added more renewables to the backlog and plans to take advantage of low interest rates to lock in lower borrowing costs. NEE remains a premium name in the sector, with visible growth, low regulatory risk and dominance in the renewable space; reiterate Outperform.
Utilities rose 3% in June on the back of continued declines in L-T rates. But the market left utilities in the dust rising 7% for the month. The S&P 500 is now up 17.3% for the first half of 2019, the best performance since 1997. Utilities have held their own up 12.8%, but still trail by 450bps. At least so far, it appears that lower interest rates are helping the broader market more than utilities. Lower rates are a double-edged sword for utilities (see our recent report), as they can lead to lower allowed ROEs in rate cases. Several of the more near-term exposed companies – PNW, CNP, AGR, ED and AEE – were among the worst performers last month.
Utilities have rallied on the large drop in interest rates in recent weeks. For the year, 10-year Treasury yields have dropped to 2.01% from 2.69%. While underperforming the market, utility stocks are up 12% YTD and valuations are at or near all-time highs. This has been great news for investors, but lower interest rates are a double-edged sword for utilities. They increase the risk of lower allowed ROEs in rate cases which have otherwise held pretty stable over the past year. In this report, we identify those most and least at risk to ROE cuts and highlight pending cases with ROE sensitivity.
Utilities: PCG, CAL Watch, DUK, Short Interest, PNW, VST, Renewables, Offshore Wind, POR
Midstream: D/DUK/ETRN/NEE, MMP, KMI, WMB, Short Interest
NEE’s messaging at the analyst day on 6/20 was generally as expected – extension of the 6%-8% growth rate another year, and details into the drivers and sustainability of growth. While the stock didn’t really react on the day, underperforming 50 bp likely due to heightened expectations, we think the company demonstrated why it is a premium name: visible growth, low regulatory risk and dominance in the renewable space. Outperform.
We expect NEE to follow what has been a successful playbook from the last few meetings. This will likely include an extension of the 6%-8% growth rate another year, to 2022, and a deep dive into the factors driving that growth. NEE is verging on being the first US utility to hit a $100B market cap and we doubt there are few companies that size with 8% growth visibility for the next 3-5 years. We also view NEP as an under the radar way to be exposed to record renewables growth alongside the best renewables developer. We reiterate Outperform on NEE/NEP and raise our NEE PT to $210 from $200.
Our annual utilities pension review – still underfunded, not much progress
Our utilities pension review, with help from Wolfe’s Accounting/Tax team and their comprehensive report, takes a look at the state of pensions in the sector using year-end 2018 data. Utilities remain underfunded for their pensions/OPEB – with most companies in the same place amid weak equity markets and higher rates. This dynamic has reversed in 2019, with yields sharply falling. There remains wide disparity in funding levels and accounting assumptions within our coverage.
- 1 of 34
- next →