Resist Utilities' Growth Blackout

2/11/2013


Energy efficiency may be good for the environment and for consumers' wallets. But it doesn't help electric utilities.

In the 15 years ended in 2011, U.S. electricity consumption fell four times; in three of those years, the S&P 500 Electric Utilities Index saw its profits dip. Based on data through the end of November, electricity consumption was likely down at least 3% in 2012, the biggest decline in at least 20 years. And based on data through the end of September, the utility index is on pace to see its profits fall about 14% for 2012 — the biggest decline in at least 20 years.

Over the last 10 years, electricity use rose by an average of 0.9% a year, versus 3.1% a year in the previous 10 years. The Energy Information Administration's projections call for annual growth averaging 0.9% for the next decade.

While usage trends for other sources of energy besides electricity are not quite so discouraging, it's no secret that traditional utilities can have trouble generating growth.

Our Top 15 Utilities portfolio takes the sector's limitations into account. Most investors select utilities for their yields. We like the yields, but we prefer our utilities to deliver profit growth as well. Over time, profit growth should spur stock-price growth and higher dividend payouts. One way to tap into that growth is to invest in utilities with large nontraditional operations such as:

• UGI ($35; UGI) generates about three-fourths of its revenue from selling propane.

• NextEra Energy ($72; NEE), in addition to operating a utility serving 4.6 million customers in Florida, is one of America's largest power generators.

• PPL ($30; PPL) operates a power-generation business, as well as the second-largest electric utility in the U.K., serving 5 million customers.

• Plains All American Pipeline ($53; PAA) and Sunoco Logistics Partners ($61; SXL) are master limited partnerships that generate their revenue from pipelines and storage tanks.

Since its inception at the start of 2007, the Top 15 Utilities portfolio has returned 65.3%, versus 31.5% for the S&P 1500 Utility Sector Index, outperforming the index in each of the last five years. Despite the Top 15's superior performance, our stocks average Value scores of 58.

This week we're making a change to the Top 15 Utilities portfolio. South Jersey Industries ($54; SJI) is replacing Entergy ($65; ETR).

South Jersey Industries generates about 60% of its profits from a gas utility in New Jersey, with the rest coming from nonregulated businesses that market natural gas and electricity, install and service heating systems and appliances, and build on-site energy systems. South Jersey also explores for oil and natural gas. The consensus projects profit growth of 8% this year.

A blackout at the Superdome during the Super Bowl made Entergy look bad, but that's not why we're downgrading the stock. The company has posted lower sales in each of the last four quarters. Wall Street expects a 9% decline in per-share profits in 2013. The shares' cheap valuation reflects uncertainty about future results, as well as consistent opposition to its nuclear plants in the Northeast.

TOP 15 UTILITIES
--- Total Return ---
Company (Price; Ticker)
6
Mos.
(%)
12
Mos.
(%)
Quadrix
Overall
Score
Amer. States Wtr. ($51; AWR)
19
42
72
CMS Energy ($26; CMS)
9
24
49
Idacorp ($46; IDA)
11
15
67
NextEra Energy ($72; NEE)
5
25
35
NV Energy ($19; NVE)
5
22
79
OGE Energy ($59; OGE)
9
14
41
Plains All Amer. ($53; PAA)
25
42
46
PNM Resources ($21; PNM)
5
22
79
PPL ($30; PPL)
8
15
48
Public Svc. Ent. ($31; PEG)
(2)
7
56
South Jersey Inds. ($54; SJI)
4
1
63
Sunoco Logis. ($61; SXL)
45
63
86
UGI ($35; UGI)
18
33
66
Westar Energy ($30; WR)
2
10
42
Wisconsin Energy ($40; WEC)
1
17
66
Note: Quadrix scores are percentile ranks, with 100 the best.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com