5 Utility Stocks Set To Outperform Q2 Earnings Estimates

The Q2 earnings season is gathering steam, with total earnings of 87 S&P 500 members that have already reported improving by +20.9% from the same period last year on +10.3% higher revenues. In this positive scenario, let us figure out how the Utility sector is poised to perform this season. Earnings from Utility are expected to improve 1.8% in Q2 on the back of a 1.3% gain in revenues.

Utility stocks are expected to gain from new rates in their service territories, customer growth and effective management of expenses, which should have a positive impact on earnings this quarter.

The unemployment rate in the United States during the second quarter was in the range of 3.8% to 4.0%. This historic low level of unemployment boosted demand for new housing units and in turn the requirement for utility services. As per data provided by U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housings units completed in June 2018 were 2.2% higher than the year-ago quarter.

Per a U.S. Energy Information Administration (“EIA”) report, first-half 2018 residential electricity sales were 7.5% higher than the comparable year-ago period, primarily due to colder weather prevailing in the current year, which will also have a positive impact on earnings. In addition, during the first half of 2018 electricity demand from commercial and industrial sectors also improved from the year-ago period.

EIA forecasts 2.7% higher U.S. electricity generation in 2018 than last year and total electricity generation across all sectors to average 11.3 gigawatt-hours per day, which would be the highest level of generation since 2010. These are the reasons for the strong and steady performance of utility operators.

However, these utilities do have their share of challenges, like a rising debt level, stringent regulations and the hurricane season, which can wreak havoc on infrastructure. Rising interest rates make bonds a strong investment option as interest rate hike increases cost of capital of the utility, impacting margins and comprising on their ability to pay or hike dividend rates. 

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