Utilities & Power

Utilities as a group underperformed close to 20% in 2020 on top of a 7% laggard year in 2019. We see scope for a better relative year in 2021, but are also mindful of 2010 when utilities posted a second double-digit laggard year as the market focused on economic recovery. The good news is utilities as a group look far better relative value now than they have in a long while, starting the year at a ~10% discount on second 12M forward P/E, which looks out beyond the market earnings trough. This discount is similar to where the group exited the 2008 recession and compares to a long-run average discount of 2% and an average premium of 8% over the past five years. In the current macro tape, with the yield curve steepening and inflation expectations on the rise, we are not rushing to add regulated utility exposure, although the group could quickly find favor if recovery falters or fails to live up to expectations. Accelerating the clean energy transition likely will offer utilities opportunities to invest faster, while also enhancing their ESG positioning. Going green faster may also exacerbate affordability challenges and put returns under scrutiny as regulators look for offsets. In this environment, successful utilities will likely be those bringing creative solutions to help keep bill pressure in check. Our recommendations continue to have a value tilt within the group and our Top Picks NRG and PCG fall under the non-utility and self-help categories.

Top Picks:

  • NRG Energy (NRG)
  • PG&E Corp. (PCG)

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Vertical Team

Jonathan Arnold

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