Utilities & Power

As a group the listed US utilities are much more defensive now than was the case in either the 2001 or the 2008/2009 recessions. This profile has not been borne out in 2020 stock performance, however, with utilities lagging the market in the initial draw down and outperforming in the rebound. We attribute this volatility to record high valuations going into the year and to growth-focused regulated business plans requiring high levels of CapEx to sustain rate base and earnings promises. We mostly expect utilities to hold the line on guidance and outlooks in the 1Q earnings cycle, yet industry data from the last recession shows spending declined by 10% between 2009 and 2010. If the coming downturn is as severe as some projections suggest, we would not expect utility growth plans to be immune and foresee pressure from regulators to dial back on CapEx in favor of affordability. While investors may prefer to see plans upheld, prioritizing customer interests in the downturn may be the better long-term choice for utilities if they are to come through with the support of regulators and policymakers intact. As of mid-April utilities had seen their relative multiple drop from a ~15% premium to a modest discount on sector consensus estimates which have barely changed. While more attractive on paper, we are reminded that utilities have exited past recessions trading at double-digit discounts. We are cautious on utility valuations overall and skewed towards relative values in the regulated group and the cash-flow positive energy merchants.

Top Picks:

  • NRG Energy (NRG)
  • Vistra Corp. (VST)

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Jonathan Arnold

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