As U.S. officials warn of the potential for a looming coronavirus outbreak and volatile equities markets suggest worry about the potential economic ramifications, American utility stocks could be "net beneficiaries" from the outbreak, according to Scotia Capital (USA) Inc.
"First, a caveat; we aren't scientists, and recognize that the impact of the coronavirus on the U.S. and global economy will be extremely difficult to estimate," analyst Andrew Weisel said in a Feb. 26 note to clients. But the U.S. utility sector may benefit from the coronavirus compared with other sectors.
Lower fuel and power costs and interest expenses are helping both customers and company earnings, while record-low bond yields continue to keep utility stocks and their dividend yields desirable, Weisel said. The falling interest rate environment will continue to be the main driver for utility stocks' valuations, along with slow global GDP growth and ongoing geopolitical tensions.
Those broader trends could compound utility stocks' high quality and defensiveness, which are already positioning them favorably compared to other industries, Weisel added.
"Looking forward, we argue that concerns about the coronavirus weighing on economic growth should increase dovishness among central banks around the world," the analyst said. "We also argue that [central bank] rate cuts should be more sticky than equity market volatility, and thus could have a longer-lasting positive effect on utility stock valuations."
Alliant Energy Corp., American Electric Power Co. Inc., CMS Energy Corp. and NextEra Energy Inc. are Weisel's "top defensive picks," while DTE Energy Co., Duke Energy Corp., Exelon Corp. and FirstEnergy Corp. have the most upside among "outperform-rated" utility stocks.
However, some industry headwinds could be exacerbated by the coronavirus. Weaker customer demand could pressure utilities, particularly from commercial and industrial customers that continue to face uncertainty with trade wars and tariffs in addition to the coronavirus outbreak. However, Weisel noted that the strong U.S. economy and jobs market should be able to make up for flat demand, barring any severe or long-term negative fundamentals. While declines in the S&P 500 will weigh on utility stocks, utilities have become increasingly decoupled from the S&P 500's fluctuations, in Scotiabank's view.
On Southern Co.'s Feb. 20 earnings call, Chairman, President and CEO Tom Fanning said that while he and his team are keeping an eye on its latest developments, outbreak and pandemics in the past have been "reasonably shallow downturns" on demand with positive recovery. "Long term, we think the fundamentals are still good, certainly, relative sense for the Southeast as compared to other places," Fanning said.
The coronavirus is creating more negative consequences for other parts of the energy world, such as oil and renewable energy companies with businesses that rely on China, where the virus initially broke out. During Ameren Corp.'s Feb. 26 earnings call, Chairman, President and CEO Warner Baxter said the company is working closely with developers of two wind projects in Missouri that have a combined capacity of 700 MW to ensure certain project components arrive from China on time and a shipment delay does not impede the company's $1.2 billion investment in new wind generation.
"At this time, both projects remain on schedule to be in service by the end of 2020, and we expect to see meaningful contributions to earnings in 2021 from these investments," Baxter told analysts.