The Zacks Analyst Blog Highlights: Consolidated Edison, Southern Company and Pinnacle West Capital

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Oct 29, 2014, 09:30 ET

CHICAGO, Oct. 29, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Consolidated Edison, Inc. (NYSE:ED-Free Report), Southern Company (NYSE:SO-Free Report) and Pinnacle West Capital Corporation (NYSE:PNW-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday's Analyst Blog:

3 Utility Stocks to Beat Earnings This Season

Investing in shares runs its own course of risk as market movements at times do not match our expectation. Appetite to take high risk is also rewarded with high returns, but every investor does not fall in that category. Even with the knowledge of risk, we keep investing in the stock market as its returns are comparatively higher than other financial instruments. Amid the currently volatile markets, investment in the Utility space could provide assured returns to risk averse investors.

Utility services play an important role in the economic progress of a nation. Demand for electricity, gas and water does vary with the ups and downs of the economy, but these companies can never go out of business. In that sense, they are always the reliable bets in uncertain times.

The utility industry has evolved over the decades with increasing industrialization and population growth spurring power demand. Historically, electrical utilities have mostly relied on coal-fired units that have increasingly come under pressure, both from the government and strident pro-environment groups.

The utilities have responded promptly to the criticisms, investing in technologies and methods to meet stringent environmental regulations. As a blessing in disguise, they've been compelled to develop new technologies to produce power at cheaper rates and boost their renewable portfolio. Utilities are also directing their investments towards natural gas based generation while closing their older coal-based units.

The regulatory nature of their operations also makes the utilities a safe bet ensuring steady returns. Moreover, they diligently share profits with their shareholders through regular dividend payments. This was true even during the height of the 2008-2009 economic crisis.

As per the Bureau of Labor Statistics, the unemployment rate in the U.S. declined to 5.9% in Sep 2014. Improvement in the job market is expected to boost demand for utility services going forward.

Moreover, the U.S. Energy Information Administration (EIA) has projected that total electricity consumption in the U.S. will increase from 3,826 billion kWh in 2012 to 4,954 billion kWh in 2040. This reflects an average annual growth rate of 0.9%. Supported by a strengthening economy and rising demand, utilities have enough room to expand going forward.

Utility infrastructure upgrades and addition of renewables to a portfolio require substantial investments for which they often have to take recourse to the markets to raise funds. The Fed in its latest policy meeting maintained its prior stance, saying that rates would stay low for a 'considerable time' even after the bond-buying program ends. The investment friendly interest rates and the Fed's reassurance about keeping them low for at least the near term will bode well for the utilities.

The Dow Jones Utility Average (DJU), which tracks the performance of 15 prominent utilities listed on the New York Stock Exchange, has shown a year-to-date gain of 20.6% closing at $582.46 yesterday.

The overall picture makes a good case for investing in the sector. Here are three utility stocks that are currently equipped with the right combination of elements to post an earnings beat this quarter.

How to Pick the Right Stocks?

The utility space is crowded with a large number of operators. Hence, selecting the right 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 determine the stocks that have a 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%.

Listed below are the three utility stocks that are likely to beat the Zacks Consensus Estimate.

Consolidated Edison, Inc. (NYSE:ED-Free Report) has a Zacks Rank #2 and an Earnings ESP of +2.80%. The Zacks Consensus Estimate is $1.43 for the third quarter.

Consolidated Edison has beaten earnings estimates fairly regularly. The company delivered positive earnings surprises in the trailing four quarters with an average beat of 10.03%. The long-term earnings growth is pegged at 2.72%. The current dividend yield of the company is 4.03%, higher than the industry average of 2.13%.

This New York City based diversified utility holding company is 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 third-quarter 2014 financial results on Nov 6.

Southern Company (NYSE:SO-Free Report) has a Zacks Rank #2 and an Earnings ESP of +1.87%. The Zacks Consensus Estimate is $1.07 per share for the third quarter.

Southern Company 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 5.79%.The long-term earnings growth is pegged at 3.51%. The current dividend yield of the company is 4.43%, much higher than the industry average of 2.13%.

St. Louis, AL based Southern Company along with its subsidiaries is involved in generation, transmission and distribution of electricity generated through coal, nuclear, oil and gas, and hydro resources.`

The company is scheduled to announce its third-quarter 2014 financial results on Oct 29.

Pinnacle West Capital Corporation (NYSE:PNW-Free Report) has a Zacks Rank #3 and an Earnings ESP of +2.30%. The Zacks Consensus Estimate for the company's third-quarter earnings is $2.17 per share.

The company's earnings surprise history looks unblemished over the trailing last four quarters, with an average beat of 7.55%. The long-term earnings growth is pegged at 3.74%. The current dividend yield of the company is 4.02%, higher than the industry average of 2.13%.

Phoenix, AZ based Pinnacle West Capital provides electricity services in the state of Arizona through its subsidiaries. Regulated Electricity and Real Estate are its two operating segments. The Regulated Electricity segment consists of traditional regulated retail and wholesale electricity businesses and related activities. It includes electricity generation, transmission and distribution. The Real Estate segment entails the company s SunCor subsidiary, which engages in real estate development and investment activities.

The company is scheduled to announce its third-quarter 2014 financial results on Oct 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 second quarter of 2014, earnings for the utility sector were up 12.3% on 3.1% higher revenues. The utilities are expected to record a single-digit earnings growth rate of 6.2% this season.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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