Zacks Industry Outlook Highlights: NRG Energy,Excel Energy and Calpine

News provided by

Oct 08, 2014, 09:30 ET

CHICAGO, Oct. 8, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Utilities, including NRG Energy (NYSE:NRG-Free Report), Excel Energy (NYSE:XEL-Free Report) and Calpine (NYSE:CPN-Free Report).

Industry: Utilities

Link: http://www.zacks.com/commentary/34728/

Utility services play an important role in the economic progress of a nation. Like every other sector, the demand for utility services fluctuates with the health of the broader economy. Demand for electricity, gas and water does vary with the swings of the economy, but these companies providing basic services can never go out of business. This marks their most fundamental strength.

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

Utilities have responded to these criticisms, investing in technologies to meet stringent environmental regulations, as solar energy investments by NRG Energy (NYSE:NRG-Free Report) and others shows. As a blessing in disguise, they've been compelled to develop new technologies to produce power at cheaper rates and boost their renewable portfolio.

The shale boom in the U.S., supported by the clean-burning nature of natural gas, has resulted in its increasing usage for power generation. A number of major utilities like Minneapolis-based Excel Energy (NYSE:XEL-Free Report), Houston-based Calpine (NYSE:CPN-Free Report) and many others have closed down coal-based generation plants and replaced them with cleaner burning natural gas powered facilities.

From an investment perspective, utilities have traditionally been the safest bet amid market fluctuation due to their defensive nature of operations. Besides offering steady returns, utilities diligently share profits with their shareholders through regular dividend payments.

The U.S. economy has improved substantially from last year with the Fed gradually scaling back its bond-buying program. The latest release from the Bureau of Labor Statistics showed that 45 states and the District of Columbia saw a decline in the unemployment rate from the prior year, while three states witnessed rising unemployment.

Moreover, per a report from the U.S. Energy Information Administration (EIA), 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 room for growth going forward.

Utilities are investing substantially in infrastructure upgrades and adding more renewables to their fuel mix. These operations are capital intensive, for which they often have to take recourse to the capital markets to raise funds. The Fed, in its latest policy meeting, maintained its prior stance, saying that rates would stay low for a longer period. The rock-bottom interest rates and the Fed's reassurance about keeping them low for at least the near term will bode well for utilities.

Zacks Industry Rank

Within the Zacks Industry classification, Utilities are a stand-alone sector, one of 16 Zacks sectors. The rural wire-line telephone companies are also grouped within the Zacks Utility sector, but the three major industries within this sector include Electric Power, Gas Distribution and Water Supply.

The Utility sector's defensive attributes reflect the group's lack of correlation with the broader market/economy. Of course, the sector's reputation as a dividend payer also adds to its perceived defensiveness.

We rank all of the more than 260 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available in the Zacks Industry Rank. http://www.zacks.com/rank/industry.php

The way to look at the complete list of Zacks Industry Rank for the 260+ industries is that the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

After scanning the Utility sector, we find three prominent industries under it in the first two categories. Gas Distribution has a Zacks Industry Rank #71, Water Supply has a Zacks Industry Rank #92 and Electric Power has a Zacks Industry Rank #146. Overall, our present outlook on this industry is Neutral.

Earnings Trends

In the second quarter of 2014, total earnings for the Utility sector were up 12.3% on 3.1% higher revenues.

In the third quarter, total earnings from the utilities are expected to be up by 8.8% on 3.5% revenue growth. The year-over-year decline in the unemployment rate in the majority of U.S. states and consistent investment by the utilities to strengthen their existing infrastructure will boost performance going forward. The infrastructure improvement drive across the sector will not only bring more system reliability but also meet the growing demand for utility services given the expanding customer base.

For 2014 and 2015, earnings from this sector are expected to increase at rates of 9.1% and 4.9% year over year. In 2014, the Utility sector is expected to surpass the S&P 500 growth of 8.0% but lag the 2015 projection of 12.0%.

For more information about earnings for this sector and others, please read our 'Earnings Trends' report.

Stocks in the Utilities sector have been strong performers lately, with prices for companies in the sector up more than +12% year to date, roughly double the pace for the S&P 500 index as a whole in that time period. This is in-line with the sector's historical track record, as the attractiveness of Utility sector stocks increases in periods of market anxiety. We would expect this trend to continue in the near-to-medium term as well.

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros.

Get the full Report on NRG- FREE

Get the full Report on XEL- FREE

Get the full Report on CPN- FREE

Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts

Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
[email protected]
http://www.zacks.com

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Logo - http://photos.prnewswire.com/prnh/20101027/ZIRLOGO

SOURCE Zacks Investment Research, Inc.