The utility sector is growing and evolving in response to sustained consumer demand for utility services. Utility companies are deploying digital technologies, such as 5G and cloud, and are adopting decarbonization strategies for a clean energy transition. And amid rising climate change concerns and carbon neutrality goals set by the Biden administration, the utility sector is expected to receive increased investments and regulatory support from the government this year.
The escalating Russia-Ukraine conflict has caused gas prices in Europe to skyrocket. Because Russia is a major exporter of LNG, the worsening geopolitical situation between Russia and the West could raise gas prices further. This should increase the profit margins of utility companies significantly.
The bullish sentiment surrounding the utility industry is evidenced by the Utilities Select Sector SPDR ETF’s (XLU) 18% rise over the past year. So, Wall Street analysts expect the shares of quality utility stocks PG&E Corporation (PCG) and The AES Corporation (AES) to rally in price the coming months.
PG&E Corporation (PCG)
San Francisco-based PCG is a holding company. The company’s primary operating subsidiary is Pacific Gas and Electric Company, which delivers and sells electricity and natural gas to customers in northern and central California. PCG generates electricity using nuclear, hydroelectric, fossil fuel, fuel cell, and photovoltaic sources. The company serves residential, commercial, agricultural customers and natural gas-fired electric generation facilities.
On Feb. 17, 2022, PCG introduced a personal microgrid backup power transfer meter device for customers that provides a reliable solution for interconnecting backup power sources to essential power devices during a power outage. This launch is expected to increase the company’s profitability.
In its fiscal year 2021 fourth quarter, ended Dec. 31, 2021, PCG's core earnings rose 35.1% from the prior-year quarter to $596 million. The company's core earnings per share increased 33.3% year-over-year to $0.28.
The $5.35 billion consensus revenue estimate for its fiscal year 2022 first quarter, ending March 31, 2022, represents 13.5% year-over-year growth from the same period in 2021. The $0.24 consensus EPS estimate for the current quarter represents 3.3% year-over-year growth.
The stock has improved 6.3% in price over the past year and closed yesterday’s trading session at $11.43.
Among the five Wall Street analysts that rated PCG, three rated it Buy, while two rated it hold. The 12-month median price target of $15.60 indicates a 36.5% potential upside. The price targets range from a low of $13.00 to a high of $18.00.
The AES Corporation (AES)
AES is a diversified power generation and utility company. The Arlington, Va.-based concern owns and operates power plants to generate, distribute, transmit, and sell electricity to customers in the residential, commercial, industrial, and governmental sectors. AES operates a generation portfolio of approximately 30,308 megawatts.
Last month, AES and Fluence Energy, Inc. (FLNC) signed an agreement to employ the AI-powered Fluence IQ Bidding Application to maximize a 1.1GW portfolio of solar and energy projects in the Western US. This agreement might optimize AES’s revenue earned by solar and battery assets.
Last December, AES acquired Community Energy Solar, LLC, a leading US solar developer. Community Energy will add its 10GW pipeline and skilled workforce to AES. This is expected to bolster the company’s expansion with a strong pipeline and boost revenue streams.
AES’ total revenue increased 8.2% year-over-year to $2.77 billion in its fiscal fourth quarter, ended Dec.31, 2021. AES’ interest income grew 22.9% year-over-year to $86 million in its fourth fiscal quarter. The company’s adjusted pre-tax contribution grew 2.8% year-over-year to $440 million.
Analysts expect AES’ EPS for its fiscal year 2022 first quarter, ending March 31, 2022, to come in at $0.33, representing an 18.9% rise year-over-year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in three of the trailing four quarters.
The stock gained marginally over the past five days. Each of the eight Wall Street analysts that rated AES rated it Buy. The 12-month median price target of $28.94 indicates a 34.9% potential upside from yesterday’s closing price of $21.46. The price targets range from a low of $25.00 to a high of $32.00.
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PCG shares were trading at $11.20 per share on Friday morning, down $0.23 (-2.01%). Year-to-date, PCG has declined -7.74%, versus a -9.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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