As another earnings season begins, Wall Street was looking past dark clouds that have settled over some gas utilities.
Analysts expected seven out of nine gas utilities selected by S&P Global Commodity Insights to report higher fourth-quarter profits compared with the year-ago period. Meanwhile, nine out of 15 multi-utilities are poised to report year-over-year earnings growth, according to consensus EPS forecasts.
The Street took a positive view on sector earnings despite persistent inflation, rising interest rates and concerns about customer bill affordability.
"We recognize headwinds from elevated interest and fuel costs weighing on earnings and affordability, but believe that the earnings power of utilities will prove to be far more durable vs. other sectors," Scotiabank analyst Andrew Weisel said in a note. After a 6.9% gain in the final quarter of 2022, a basket of the nine gas utility stocks was up 2.7% this year through Jan. 23.
Last year, utility stocks strongly outperformed the broader market. For Hennessy Funds Chief Investment Officer Ryan Kelley, the big question was when the large defensive premium commanded by utility stocks — a dividend-paying safe haven asset — might begin to normalize.
"I don't really see that happening any time soon — I still think that the overall market has a lot of uncertainty," Kelley said in an interview. "I still think that [utility stocks] are the safer plays out there."
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Like other market watchers, Kelley will monitor quarterly conference calls for signs that rising gas bills are creating earnings headwinds. Kelley will also watch for executives' responses to anti-gas sentiment and updates on mergers and acquisitions, a sign of confidence in the industry's future.
Weisel expected utilities to continue favoring asset sales over issuing equity to finance operations.
Analysts expected pure-play gas distributors Atmos Energy Corp. and One Gas Inc. to continue a streak of year-over-year profit growth. They saw New Jersey Resources Corp., Northwest Natural Holding Co. and UGI Corp. also posting earnings gains.
Wall Street expected Chesapeake Utilities Corp. and South Jersey Industries Inc. to return to year-over-year growth after reporting profit declines in the prior quarter. Consensus estimates showed Spire Inc. and Southwest Gas Holdings Inc. extending year-over-year profit declines.
Among multi-utilities with substantial gas delivery businesses, analysts projected that Black Hills Corp., DTE Energy Co., CMS Energy Corp., NiSource Inc., and WEC Energy Group Inc. would post year-over-year earnings growth, while Sempra and CenterPoint Energy Inc. would report a drop in profits.
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