Valuation Dashboard: Utilities - Update

|
Includes: AEP, AES, ALE, CMS, DTE, ED, EIX, NE, NI, NJR, SCG, SO, SPY, SR, UGI, VVC, XLU
by: Fred Piard

Summary

Three key factors are reported across industries in utilities.

They give a valuation status relative to history.

They give a reference for picking stocks in each industry.

This monthly series of articles provides a valuation dashboard in sectors and industries. I follow up a certain number of fundamental factors and compare them to historical averages. This article covers utilities. The choice of the fundamental ratios used in this study has been justified here and here. You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A list of stocks to consider is provided in the conclusion

Methodology

  • Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Return on Equity (ROE).
  • They are compared with their own historical averages "Avg." The difference is measured in percentage for valuation ratios and in absolute for ROE, and named "D-xxx" if xxx is the factor's name. For example, D-P/E = (AvgP/E - P/E)/AvgP/E. It can be interpreted as a percentage in under-pricing relative to a historical baseline: the higher, the better. It points to over-pricing when negative. ROE is already a percentage. That's why we take the simple difference: D-ROE = ROE - AvgROE.

The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors.

The price-to-cash-flow ratio used in my dashboards for other sectors has been eliminated here because discontinuities and outliers make it often irrelevant in utilities.

Industry valuation table on 1/15/2016

The next table reports the three industry factors. For each factor, the next "Avg" column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next "D-xxx" column is the difference as explained above. So there are three columns for each ratio.

P/E

Avg

D- P/E

P/S

Avg

D- P/S

ROE

Avg

D-ROE

Electric Utilities

18.42

15.94

-15.56%

1.78

1.22

-45.90%

9.17

10.43

-1.26

Gas Utilities

21.34

17.24

-23.78%

1.44

0.97

-48.45%

9.79

11.49

-1.7

Multi-Utilities

19.68

16.59

-18.63%

1.67

0.95

-75.79%

9.59

9.48

0.11

Water Utilities

22.72

23.68

4.05%

5.94

3.94

-50.76%

3.01

7.96

-4.95

Ind.Power Prod. & Energy Traders*

44.25

34.9

-26.79%

2.33

4.16

43.99%

-3.71

-5.15

1.44

Click to enlarge

* Averages since 2005

Valuation

The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better.

Price/Earnings:

Price/Sales:

Quality (ROE)

Relative Momentum

The next chart compares the price action of the SPDR Select Sector ETF (XLU) with SPY (chart from freestockcharts.com).

Click to enlarge

Conclusion

XLU has outperformed SPY by about 4.5% in the last three months. On this period, the five best performing S&P 500 utilities stocks are Consolidated Edison Inc. (NYSE:ED), NextEra Energy Inc (NYSE:NE), NiSource Inc. (NYSE:NI), SCANA Corp (NYSE:SCG), Southern Co (NYSE:SO). NI has hit an all-time high last week.

All industries are stable since last month for my metrics. Electric and gas utilities stay the weakest ones with all factors in negative territory. Independent power producers and energy traders stay above their baseline in quality with mixed valuation factors.

There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. The next table shows a list of stocks in the utilities sector. They are all cheaper than their respective industry for the two valuation factors simultaneously: Price/Earnings and Price/Sales. Then they are selected for their higher return on equity.

This screen updated and rebalanced monthly has an annualized return about 10.76% with a 48% drawdown for a 17-year backtest. The sector ETF XLU has an annualized return of only 5.98% with a 53% drawdown on the same period. Past performance, real or simulated, is not a guarantee of future return. This list may be considered an entry point for further due diligence or as a portfolio after adding a few trading rules and market timing. This is not investment advice. Do your own research before buying.

AEP

American Electric Power Co Inc

UTILELECTRIC

AES

AES Corporation (The)

UTILINDEP

ALE

ALLETE Inc.

UTILELECTRIC

CMS

CMS Energy Corp

UTILMULTI

DTE

DTE Energy Co

UTILMULTI

EIX

Edison International

UTILELECTRIC

LG

Laclede Group Inc. (The)

UTILGAS

NJR

New Jersey Resources Corp

UTILGAS

UGI

UGI Corp

UTILGAS

VVC

Vectren Corp

UTILMULTI

Click to enlarge

If you want to stay informed of my updates on this topic (including the portfolio) and other articles, click the "Follow" tab at the top of this article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.