Solid Sector Earnings Have Spurred A Major Comeback For Utilities ETFs

February 26, 2017 7:01am NYSE:XLU
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From Zacks: The fourth-quarter earnings season of the utility sector has been quite a disappointment with revenues from some major companies missing estimates and earnings meeting or lagging expectations.


Results from bigwigs like Duke Energy Corporation (DUKFree Report) and Dominion Resources Inc. (DFree Report) and NextEra Energy (NEEFree Report) give such cues.

As per the Earnings Trend report issued on February 15, 2017, earnings of all the utility companies so far are up 10.2% year over year in the fourth quarter of 2016, with 40% of the companies beating the Zacks Consensus Estimate. Meanwhile, revenues rose about 8.4% in the quarter, with only 20% surpassing the consensus mark.

The blended beat ratio of the utility sectors is 10%, which is pretty insignificant in comparison to sectors like consumer discretionary, materials, construction and energy that reported blended beat ratios over 60% (read: Play Positive Surprise with These Sector ETFs).

Inside the Key Earnings

In mid-February, Duke Energy reported fourth-quarter 2016 adjusted earnings of 81 cents per share, which were in line with the Zacks Consensus Estimate. Quarterly earnings however declined 6.9% year over year owing to higher planned operation and maintenance expenses. The company’s total operating revenue was $5.62 billion, up 15.9% from $4.85 billion a year ago. Nevertheless, the reported figure missed the Zacks Consensus Estimate of $5.86 billion by 4.1%. The company expects to report 2017 adjusted EPS in the range of $4.50−$4.70. The stock has a Zacks Rank #3 (Hold).

Dominion Resources reported in early February. Its quarterly earnings of 99 cents per share missed the Zacks Consensus Estimate. Operating earnings rose 41.4% from 70 cents in the prior-year quarter. Dominion’s total revenue came in at $3.10 billion, missing the Zacks Consensus Estimate of $.39 billion by 8.6%. However, quarterly revenues were up 20.2% year over year.

In first-quarter 2017, Dominion expects to generate operating earnings of 90 cents to $1.10 per share. In the year-ago quarter, the company had reported earnings of 96 cents. For the full year, Dominion guided earnings in the range of $3.40 to $3.90 per share. The stock has a Zacks Rank #4 (Sell).

In late January, NextEra Energy’s quarterly adjusted earnings of $1.21 per share missed the Zacks Consensus Estimate of $1.29 by 6.2%. Reported earnings were, however, up 3.4% year over year. In the fourth quarter, NextEra Energy’s operating revenues were $3.70 billion, lagging the Zacks Consensus Estimate of $4.16 billion by nearly 11%. Reported revenues also decreased 9.1% from the year-ago quarter. NextEra Energy provided its adjusted earnings guidance in the range of $6.35–$6.85 for 2017 and $6.80–$7.30 for 2018. The stock has a Zacks Rank #2 (Buy).

Should You Still Buy These Stocks or ETFs?

The Zacks Industry Rank for the space is in the top 38% and sector rank is in the top 50%. This is probably due to President Trump’s expansionary policies toward U.S. infrastructure and plans of boosting the energy sector through more shale oil production (read: Will the Comeback Rally of Utility ETFs Continue in 2017?).

Also, the market seems to be a bit overvalued given the recent run in stocks on hopes of tax cuts and deregulations. So, some edgy investors must have bet on some high-dividend paying utility ETFs to get an exposure over a sector which is deemed to be a safe haven one (read: Utility ETFs to Shelter Portfolio from Market Turmoil).

Since there are mixed Zacks Ranks for the stocks discussed above, investors can target utility ETFs like Utilities Select Sector SPDR ETF (XLUFree Report) , Vanguard Utilities ETF (VPUFree Report) , iShares US Utilities (IDUFree Report) and Fidelity MSCI Utilities ETF (FUTYFree Report) . The afore-mentioned stocks have a considerable weight in these ETFs. The basket approach will better serve investors who are particularly apprehensive about betting on a specific stock (see all Utilities/Infrastructure ETFs here).

The Utilities SPDR ETF (NYSE:XLU) closed at $51.59 on Friday, up $0.77 (+1.52%). Year-to-date, XLU has gained 6.22%, versus a 5.91% rise in the benchmark S&P 500 index during the same period.

XLU currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 14 ETFs in the Utility ETFs category.


This article is brought to you courtesy of Zacks Research.


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