3 Utility Stocks to Top Earnings Estimates - Earnings ESP

The utility sector – a lifeline for the development of any country – is in the midst of a business and technology transformation in the U.S. With stringent environmental regulations in place, utilities are now gradually shifting their mode of power generation to natural gas and alternate energy sources. Global concerns about the pitfalls of green-house gas emissions supported by increasing restrictions on fossil-fuel usage have brought alternative energy into the limelight.

While the fortunes of some industries are more allied to the overall economy than others, few show as little volatility and are as stable as the utility sector. The times are indeed uncertain given the lingering political tensions between Russia and Ukraine, concerns of a slowdown in the world's largest economy, namely, China and less-than-expected growth in Japan. For risk-averse investors the utility sector seems to be a good bet in uncertain times. Demand for utility services stay primed no matter what the economy is doing. 

Moreover, utilities have been known to pay dividends consistently, thereby retaining the confidence of yield hungry investors and proving yet again the sector's defensive characteristics.

This sector has also shunned the broader market downtrend lately and has been outperforming the broader market indices since the start of the year. Climate changes have brought about severe fluctuations in the weather. The last winter was a case in point. Most of the earnings beats that have been reported this season like

or

came on the back of a severe winter with the U.S. seeing precipitous drop in temperatures in more than a decade.

With a number of industry players, selecting the correct stocks may appear to be a daunting task. This is where our proprietary methodology comes in handy. It's fairly simple – stocks with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks

are the ones that are likely to beat earnings estimates this announcement.

Earnings ESP is our proprietary methodology for determining stocks that have high chances of delivering earnings surprises in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Now, for the utility sector, the earnings picture for the first quarter has so far showed impressive numbers. With 47.1% of the companies in the sector having already released their first quarter earnings this season, the sector racked up an earnings beat ratio (the percentage of companies coming out with positive surprises) of 81.3% and a revenue beat ratio of 56.3%. Earnings shot up 22.4% in the first quarter 2014, mostly on the back of a severe winter.

Given the positive sentiment, it might be a good idea to bet on three utility stocks that are poised to beat earnings estimates this quarter.

With a market cap of $9.75 billion, this St. Louis based company generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois.

It is worth noting that in the fourth quarter 2013 Ameren had delivered an impressive 58.3% earnings surprise. With its recent exit from the merchant generation business – Ameren Energy Resources Company – Ameren is now more focused on its rate-regulated utilities. Now that the divestiture is complete, we expect Ameren to witness modestly rising earnings at its core utilities, primarily in Illinois, over the long term.

Ameren's current dividend yield of 3.98% is higher than the industry as well as the S&P 500 peer group average of 2.63% and 3.55%, respectively.

The combination of Ameren's Zacks Rank #3 (Hold) and +6.25% ESP makes us confident of an earnings beat on May 8 before the bell.

UIL Holdings is engaged in the ownership of its operating regulated utility businesses. The company recently announced its plan to acquire assets along with certain liabilities of the nation's largest municipally-owned natural gas utility – Philadelphia Gas Works – from the City of Philadelphia for $1.86 billion in cash.

This takeover is a strategic fit for UIL Holdings. It will significantly enhance the company's natural gas operations, making it a more geographically diversified energy delivery utility holding company serving over 1.2 million gas and electric customers. The proximity to profuse regional gas supply in the Marcellus and Utica shales is an added bonus. Further this addition will enhance UIL's scale and financial profile and will deliver significant long-term benefits to its shareholders.

With a Zacks Rank #3 (Hold), the stock currently has an impressive dividend yield of 4.81%, much higher than the industry average of 2.11%. Last quarter, the company delivered a positive earnings surprise of 25.86%.

UIL Holdings is scheduled to announce its first quarter 2014 financial results on May 7 after the market close and has an Earnings ESP +5.77%.

Topeka, KS based Westar Energy provides electricity to retail as well as wholesale customers. The company utilizes coal, natural gas, uranium, wind and landfill gas for electricity generation.

Westar Energy's capital spending program amply reveals its plans to upgrade utility assets and add new ones. Westar Energy is in the middle of several projects, including the Post Rock Wind Farm project, Ironwood Wind Power project and Prairie Wind joint venture. Successful completion of these projects will enable Westar Energy to serve more customers, thereby boosting its financial results.

In the fourth-quarter 2013, the company had delivered a positive earnings surprise of 14.29% driven primarily by higher prices, while the four-quarter trailing average beat is pegged at an impressive 17.45%.

The company's annual dividend yield of 3.98% is higher than the industry average of 2.11%. This makes the company attractive to investors.

This Zacks Rank #2 (Buy) stock still has enough fundamentals to drive it upward. It has an Earnings ESP +2.27% and is expected to report first quarter earnings on May 8 after the market close.

For investors looking for a regular return on investment, the dividend yield from all the three utilities discussed above is higher than the industry averages. Their stable earnings performance also offers solid reasons to explore the utility space. Backed by a favorable Zacks Rank and a positive Earnings ESP, these could be a great idea for investors to still gain from the Q1 earnings season.