Utilities, Today and Yesterday
8/12/2013
If you haven't checked out utilities for awhile, get ready for a shock, because today's crop looks different.
With an average gross profit margin of 29%, utilities are more profitable than at any time in the last 15 years. S&P 1500 Index utilities average oneyear earnings growth (5%) and Quadrix scores for Momentum (55) and Earnings Estimates (56) well above longrun averages.
In many ways, however, utilities haven't changed. They average mediocre Overall scores of 52, roughly in line with the 10year average, and 3.5% yields, below the 10year average yield of 3.8%. Utilities have long been known for fat yields and slim growth, and their average estimate for fiveyear profit growth of 4.7% is the lowest in more than nine years.
Perhaps the biggest difference between today's utilities and yesterday's revolves around valuation. S&P 1500 utility stocks average price/earnings ratios of 18, price/sales ratios of 1.7, and price/book ratios of 1.9 — all three at least 15% above fiveyear averages. Utilities average Value scores of 60, near the fiveyear average of 62 but well below the average of 70 since 1994.
Our advice? Focus on only the best stocks, and spread your bets in a sector that's riskier than many people realize. Readers seeking utility exposure should check out our Top 15 Utilities portfolio (on page 12 and at www.DowTheory/Go/Top15), which has returned 24.2% so far this year versus 15.6% for the S&P 1500 Utility Sector Index. This week, we're making changes to the portfolio.
Two stocks in: Alliant Energy's ($53; LNT) welldefined, if moderate, growth potential makes it a safe pick. The company has topped the profit consensus by at least 7% in four of the last five quarters. Southwest Gas ($49; SWX), despite aboveaverage profit and dividendgrowth potential, looks cheap relative to its gasutility peers.
Two stocks out: Shares of South Jersey Industries ($61; SJI) have performed well despite weak operating momentum and declining profit margins. Public Service Enterprise ($34; PEG) has not delivered much sales and profit growth recently, and we fear the stock will not meet expectations.
