The utility sector appears to be in great shape as chances of the Fed hiking rates in the near term have dropped significantly after Fed Chair Janet Yellen's dovish comments, which were further reinforced by Federal Bank of New York President William C. Dudley. Dudley said that due to the uncertain U.S. economic outlook, a cautious and gradual approach to interest rate increases is expected.
This raised the appeal for utility stocks, which offer solid dividend payouts and excellent capital appreciation over the longer term. Further, thanks to the sector's low correlation with the market, huge swings in the stock market don't have any effect on utility stocks. The utility sector is thus considered a defensive play or safe haven in turbulent times.
Uncertainty over rate hikes, weaknesses in the global economy and mixed domestic data have benefited the sector. In fact, utility ETFs saw smooth trading, with the Utilities Select Sector SPDR ETF (NYSEARCA:XLU), the Vanguard Utilities ETF (NYSEARCA:VPU), the iShares U.S. Utilities ETF (NYSEARCA:IDU) and the Fidelity MSCI Utilities Index ETF (NYSEARCA:FUTY) gaining over 10% each in the last three months (as of April 25, 2016).
Investors must be interested to know how the sector might be performing in the first-quarter 2016 earnings season to help them make an investment decision.
Although utility stocks are yet to report, as per the Zacks Earnings Trend report, it is one of the few sectors that are expected to show earnings growth in the quarter. Utilities are expected to post earnings growth of 5.3% in the first quarter compared with a decline of 1.6% in fourth-quarter 2015.
However, just looking at the overall sector outlook is not enough. Let's also look at how the individual stocks to which the utility ETFs have significant exposure are expected to perform. We have highlighted the earnings prediction for some of these companies below:
Zacks Surprise Prediction
Duke Energy Corporation (NYSE:DUK) has a Zacks Rank #4 (Sell) and an Earnings ESP of -1.74%, making a beat unlikely. Also, the earnings surprise track over the past four quarters is not good, with a negative average surprise of 1.72%. Meanwhile, the company witnessed downward earnings estimate revision of 1 cent over the past 7 days for the yet-to-be-reported quarter. The stock has a VGM of 'C'. The company will report on May 3, before market opens. DUK has a weight of 8.3%, 7.3%, 7.5% and 7.2% in XLU, VPU, IDU and FUTY, respectively.
NextEra Energy (NYSE:NEE) is expected to release its earnings report on April 28 before market opens. It has a Zacks Rank #3 (Hold) but an Earnings ESP of 0.00%, again putting the odds of a beat against it. The company also saw downward earnings estimate revision of a penny over the past 7 days for the to-be-reported quarter. It delivered positive earnings surprises in three of the last four quarters, with an average beat of 4.28%. Further, the stock has a VGM score of 'C'. NEE has 9%, 7.1%, 7.5% and 7.3% weight in XLU, VPU, IDU and FUTY, respectively.
Dominion Resources, Inc. (NYSE:D) has a Zacks Rank #3 and an Earnings ESP of 0.00%, making an earnings prediction difficult. The Zacks Consensus Estimate for first quarter 2016 is 96 cents, down 1 cent over the past seven days. Further, the stock has an unfavorable VGM score of D. The company is expected to report before market opens on May 4. D has a weight of 7.1%, 5.8%, 6% and 5.7% in XLU, VPU, IDU and FUTY, respectively.