Credit Suisse says utilities are a great inflation hedge, names its top picks in the sector

Published Tue, Apr 26 20226:19 AM EDT

As inflation continues to rise, Credit Suisse named a slew of utilities companies it thinks are poised to outperform and benefit in the long-term. Analyst Nicholas Campanella initiated coverage of 25 utilities companies, naming American Electric Power , Duke Energy , Entergy and Sempra Energy as the top picks to hedge inflation as he thinks the sector can effectively pass off costs to investors. "We think inflation is the biggest theme to watch for the group this year, and believe large-cap multistate jurisdictions and names with positive correlated exposure to commodities will outperform smaller regional peers," Campanella wrote in a note to clients. "Companies best positioned will lack large project risk, and have constructive relationships with utility commissions. Bigger is better. We think multi-state vertically integrated utilities are best positioned. Campanella also thinks companies focusing on decarbonizing the power grid or their fleets with new renewables stand to benefit. Amid rising inflation the utilities sector has risen 3% since the start of the year, outperforming the broader S & P 500 which is down almost 10%. The sector is generally viewed as economically insensitive and outperforms the broader markets when the Fed starts hiking rates, a recent CNBC Pro screen found . Among his picks, Campanella called American Electric Power a "capital rotation playbook at a discount" and slapped a $113 price target on the name, which is 12% above Monday's close price. He said investors should focus on the company's ongoing decarbonization efforts and the likely closure of its sale of Kentucky Power. Meanwhile, Campanella likes Duke Energy's plans to implement performance-based rates in the Carolinas and added a $125 price target which implies a near 10% upside from Monday's close. "We see DUK as well positioned on two core themes this year: (1) decarbonization rate-of-change, where DUK will continue to refine retirement plans for its 16GW coal portfolio (the largest in the country for any IOU on a MW basis); and (2) inflation, where we see DUKs size and multi- state jurisdiction footprint benefiting it vs. peers," he wrote. Campanella initiated coverage of Sempra Energy with a $180 price target, implying a potential 8.8% return from Monday and put a $136 price target on Entergy respectively, which represents an 11% upside.

Duke Energy's Project Manager Coy Graham walks across the top of the gas-fired power plant he helped build at Duke Energy's Crystal River Energy Complex in Crystal River, Florida, March 26, 2021.

Dane Rhys | Reuters

As inflation continues to rise, Credit Suisse named a slew of utilities companies it thinks are poised to outperform and benefit in the long-term.