7 Ways To Play An Improving Utilities Industry

Baird’s David E. Parker reduced the Utilities sector outlook to Neutral from Positive, citing escalation of macro market uncertainties and the recent outperformance of utility stocks. The S&P Utility Index is up 6.3 percent year-to-date, versus a 5.5 percent decline in the S&P500 and a 9 percent decline in the NASDAQ.

Parker expects the sustainability and increasing urgency of pipe replacement investment to drive attractive total returns. YTD, stocks of water and gas utilities are up 8 percent and 10 percent, respectively. The stocks of electric utilities have, however, underperformed as visibility for EPS growth in the near-to-intermediate term diminishes.

“Substantial stock price outperformance has moved most utility stock prices close to our expected near-term price objective,” Parker said, while recommending investors to adopt a selective approach to utility sector investments at current valuation levels.

Top Investment Options In The Segment

• CMS Energy Corporation CMS – [Rated: Outperform, PT: $42]
• Alliant Energy Corporation LNT – [Rated: Outperform, PT: $72]
• NextEra Energy Inc NEE – [Rated: Outperform, PT: $120]
• WEC Energy Group Inc WEC – [Rated: Outperform, PT: $60]
• Aqua America Inc WTR – [Rated: Outperform, PT: $34]

“These utility companies have transparent pipelines of infrastructure investment in states where regulators have adopted constructive policies for infrastructure system upgrades/replacement, that should support above-average rate base growth and position the stocks to outperform peers,” the Baird report mentioned.

Parker expects the upcoming constructive regulatory decisions to improve transparency of “what is expected to be above-average infrastructure investment opportunities,” which in turn is likely to fuel attractive total returns at PNM Resources Inc PNM [Rated: Outperform, PT: $34] and SJW Corp. SJW [Rated: Outperform, PT: $39].

The analyst downgraded the rating for American Water Works Company Inc AWK from Outperform to Neutral, based solely on valuation. The price target for the company is $67.