3 Utilities Poised To Continue Stellar Run In Q4 Earnings

Domestic-focused capital intensive Utilities continue to perform steadily as the demand for utility services hardly fluctuates with the movements in the economy. Cost control, new electric rates, and customer growth continue to help the utility sector to maintain operational stability.

Earnings of the Utilities sector are expected to improve 11.6% on 0.1% improvement in revenues (for more details refer to our weekly Earnings Trends) in 2018. Per a projection from the U.S. Energy Information Administration (“EIA”), retail prices of electricity will continue to increase at all customer segments, which is a way of boosting the utilities’ top-line growth. Per EIA release, wholesale power prices at major trading hubs in the United States in 2018 were generally higher than that of 2017, which will also provide support to utilities.

To provide uninterrupted 24x7 services to customers, the utilities are required to upgrade, maintain and replace older wires, electric poles, as well as power stations. Hence, apart from internal sources of funds, utilities depend on the credit market for funds to carry on upgrades.

In a way, low interest rates allow the utilities to continue with their long-term capital investment plans by borrowing funds from the market. However, the ongoing revision in rate hikes will continue to pose difficulties for the capital-intensive utility stocks. The utilities, after repayment of cost of capital, might find it difficult to reward their shareholders.

The Federal Reserve, after increasing the interest rates four times in 2018, reduced rate hike possibilities to two from an earlier expectation of three in 2019. The cautious approach of the Fed takes into consideration the lower-than-expected development in global economy, uncertainty surrounding the U.S.-China trade dispute and impact on the global economy post-U.K.’s exit from European Union, which is indeed good news for the utility space.

Likely Q4 Outperformers

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