Where Is the Power From the Utilities Sector?

Power lines
Power lines

The S&P 500 is now up over 11% year-to-date and up over 50% since the March lows. By comparison, the utility sector is down over 1% YTD and up ~30% since its March low and has been the second worst performing sector of this rally (only telecom is worse).

With earnings season close to a finish, 74% of the S&P 500 has beaten earnings estimates this season while only 58% of utilities can make the same claim. This is despite an EPS growth rate for the sector of -9% vs. -28.7% for the entire S&P according to Thomson Reuters. The story is true on the revenue side as well. While 46% of the S&P has beaten top line estimates, only 18% of utilities have done so - bottom of all sectors. In Q1 and Q4, the sector had more companies beat earnings estimates (in percentage terms) than the overall S&P.

The slow economy clearly has had an impact on demand. Georgia's Southern Company said in its earnings release that "Industrial sales sustained the greatest impact, dropping 17.6% in the second quarter, compared with the second quarter last year..." David Ratcliffe, Southern's President and CEO said ""It is clear that as this challenging economy continues, our revenue erosion is significant, particularly among our industrial and manufacturing customers." Florida Power and Light also cited the weight of the economy as the battered residential market in Florida has usage per customer and total number of customers down over a year ago.

Both FPL and SO were amongst the utilities that beat earnings estimates. Entergy which missed EPS estimates saw its biggest declines from the industrial sector as well, with industrial sales down 9.7%. Duke Energy said that they are beginning to see signs of stabilization in the industrial segment of their customers.

The good news is that as the economy turns, industrial demand should return. On Monday, the ISM Manufacturing Index showed continued contraction, but at a slower rate. The data indicated growth in new orders and production. If that trend continues, some of these utilities should see some top line gains. Below are some utilities that have underperformed since the start of March, but could see double digit growth in 2010. PPL , for example, lowered guidance yesterday for 2010 but is still expected to double its full year EPS according to Thomson Reuters consensus estimates.

Watch Closing Bell later today for an interview with PG&E CEO, Peter Darbee.

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