With Utilities, Value Works Best

11/11/2013


Of the six category scores used to calculate our Quadrix Overall score, Value has been the most effective.

Stocks in the top quintile (one-fifth) as measured by Value score have outperformed high scorers in the other five categories in eight of the 10 sectors Standard & Poor's uses to segment the stock market. In the other two, Value has been second-best. The Value score has been particularly effective with utility stocks.

The Overall score has not worked very well with utility stocks. Neither have most of the category scores. But Value stands out, with top scorers outperforming the average utility stock by an average of 2% in rolling 12-month periods since October 1994.

Even within the Value score, which is derived from more than a dozen valuation metrics, some individual statistics work better than others. We've isolated four valuation ratios (price/sales, price/book, price/cash flow, and enterprise value/EBITDA) that satisfy the following criteria:

Comprehensive coverage. More than 95% of utility stocks in the S&P 1500 Index generate a score for these metrics. For example, while valuation ratios relative to free cash flow tend to have predictive power with utilities, most utility companies don't provide enough data to calculate a price/free cash flow ratio.

Long history. We have data for all four ratios dating back 19 years. Some valuation metrics based on earnings estimates showed promise, but we disregarded them because our estimates data only reaches back to 2004.

Strong performance. As measured by each of the four ratios, the top one-fifth of S&P 1500 utility stocks outperformed the average stock by an average of at least 2% in 12-month periods over the last 19 years.

Within the sector, electric utilities — which comprise 40% of the companies in the sector and more than 50% of its stock-market capitalization — average the highest Value scores (74) of any industry group, as well as slightly higher scores in the four key ratios. While utilities as a group look attractively valued, water utilities continue to stand out from the crowd as far more expensive than the rest.

Compared to the average utility in the S&P 1500, stocks in our Top 15 Utilities portfolio average higher scores for Overall, Value, and all four of the powerhouse valuation ratios.

TOP 15 UTILITIES CHEAPER THAN THE SECTOR
Our utilities average higher Quadrix scores than the average utility stock in the S&P 1500 Index for Overall, both sector-specific ranks, Value, and four of the most effective Value factors. For example, AGL Resources ($48; GAS) gets a score of 64 for price/sales, meaning its price/sales ratio is lower than about 64% of U.S.-traded stocks.
---------------------------------------------- Quadrix Scores ----------------------------------------------
Company (Price; Ticker)
Dividend
($)
Yield
(%)
Overall
12-
Factor
Sector
Reranked
Overall
Value
Price/
Sales
Price/
Book
Price/
Cash
Flow
Ent. Value/
EBITDA
AGL Resources ($48; GAS)
1.88
3.9
79
96
94
73
64
61
81
64
Alliant Energy ($52; LNT)
1.88
3.6
57
42
52
71
51
55
79
50
AmeriGas ($45; APU)
3.36
7.5
52
76
31
68
88
79
73
47
Atmos Energy ($44; ATO)
1.40
3.2
58
87
68
68
69
63
75
59
CMS Energy ($27; CMS)
1.02
3.7
69
35
66
71
68
47
84
65
DTE Energy ($70; DTE)
2.62
3.8
45
23
27
72
63
64
84
64
Great Plains ($23; GXP)
0.87
3.7
74
83
90
82
57
82
84
61
Idacorp ($50; IDA)
1.72
3.4
91
72
99
85
42
67
77
51
Integrys Energy ($59; TEG)
2.72
4.6
62
77
77
82
73
66
78
53
New Jersey Res. ($46; NJR)
1.68
3.7
90
86
97
82
83
48
61
35
PNM Resources ($23; PNM)
0.66
2.8
72
97
85
77
61
77
84
65
Southwest Gas ($55; SWX)
1.32
2.4
81
99
96
71
62
55
86
76
Sunoco Logistic ($70; SXL)
2.52
3.6
90
80
84
64
63
38
66
43
UGI ($41; UGI)
1.13
2.8
71
94
82
79
82
53
81
79
Westar Energy ($32; WR)
1.36
4.3
70
37
80
86
53
69
84
63
Top 15 Utilities average
3.8
71
72
75
75
65
62
78
58
S&P 1500 util. stock avg.
3.6
55
49
51
68
57
58
71
57

 


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