Are Utilities Still Safe Havens?

04/06/2020 5:00 am EST

Focus: UTILITIES

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

With COVID-19 wreaking havoc on the economy, are utility safe havens or will their earnings wilt under mounting economic pressure? asks sector expert Roger Conrad, editor of Conrad's Utility Investor.

I believe in a slow and steady approach for accumulating companies below our buy targets. Conservative Holdings currently in range are certainly safe enough for anyone to buy and hold now. Two electric utilities make the list: Edison International (EIX) and Exelon Corp (EXC).

Edison took a dive despite announcing generally solid Q4 results and guidance. The likely reason is concern about wildfire-related costs, which came in higher than expected.

But the basic case here is the same: A clear path to mid-to-upper single digit earnings growth long-term as the utility invests with regulators’ approval in California’s aggressive energy plans. Buy Edison up to 75.

Exelon shares have been volatile since the company announced federal officials are still investigating its lobbying efforts in the Illinois legislature. And Federal Energy Regulatory Commission efforts to intervene on behalf of fossil fuel generators threaten to disrupt the wholesale electricity markets where it operates.

But the $26 billion regulated utilities CAPEX plan from 2019-2023 is still on track, as is the primary financing method of using free cash flow generated by the company’s unregulated nuclear power fleet.

That means the investment case is intact, as Illinois prepares to pass pro-nuclear legislation and other states challenge FERC’s recent orders, including potentially leaving the Regional Transmission Operator. Exelon remains a buy up to $48.

Among our Aggressive holdings, I’ve raised my "buy target" on Southern Company (SO) to $60. That follows the company’s strong Q4 numbers and more importantly management’s positive guidance for the Vogtle nuclear construction project.

There are still hills to climb for Vogtle to enter service before the respective deadlines of November 2021 and November 2022 for Units 3 and 4. And Southern’s industrial sales are likely to take another hit this year from the impact of COVID-19. So no one should throw caution to the winds.

But after the successful sale of assets related to the Atlantic Coast Pipeline, Southern will no longer need to issue equity the next five years, other than through its DRIP.

And there’s a reasonable possibility the company will complete the project six months early, therefore getting the benefits of its revised deal with its partners. That’s good reason to buy at $60 or less.

Subscribe to Conrad's Utility Investor here…

Related Articles on UTILITIES