The utility industry is known for stability regardless of economic cycles and steady income stream due to the essential nature of services it provides, such as heat, water, and electricity. Additionally, the transition to cleaner sources of energy brightens the industry’s long-term prospects.
Moreover, the anticipated rate cuts this year by the Federal Reserve could be beneficial for utility companies by reducing their borrowing costs. Given this backdrop, it could be wise to buy fundamentally strong utility stocks Centrais Elétricas Brasileiras S.A. - Eletrobrás (EBR), TransAlta Corporation (TAC), and Centrica plc (CPYYY).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the prospects of the utility industry.
2023 was a disappointing year for utility companies as conservative and income-focused investors found bonds more attractive than the average dividend yield offered by utility companies. Moreover, the high interest rate environment also kept investors away, as utilities often have high debt.
However, indications of interest rate cuts this year will likely benefit the industry, as it could lower their borrowing costs. Moreover, the ongoing transition to clean energy, growing demand for green energy, advancements in grid modernization, and adoption of technologies like artificial intelligence to optimize operations are expected to shape the industry's long-term growth.
As utilities shift from fossil fuels, they can achieve stable costs and enhanced profitability by gradually reducing their vulnerability to fluctuations in fossil fuel prices. The global utilities market is forecasted to grow at a CAGR of 6.8% and reach $8.31 trillion by 2027.
Notably, investors’ interest in utility stocks is evident from the SPDR Select Sector Fund – Utilities’ (XLU) 13.5% returns over the past three months.
Considering these conducive trends, let’s analyze the fundamentals of the three Utilities - Foreign picks, beginning with the third choice.
Stock #3: Centrais Elétricas Brasileiras S.A. - Eletrobrás (EBR)
Based in Rio de Janeiro, Brazil, EBR and its subsidiaries engage in the generation, transmission, and distribution of electricity in Brazil. The company generates electricity through hydroelectric, thermal, nuclear, wind, and solar plants.
On December 21, 2023, EBR announced the completion of the acquisition of 51% stakes in Vale do São Bartolomeu S.A. (VSB) and Triângulo Mineiro Transmissora S.A. (TMT) from FIP Milan.
This transaction will consolidate annual permitted revenues of approximately R$103 million ($21.09 million), EBITDA of R$93 million ($19.04 million), and extend concession terms until 2043, aligning with EBR’s commitment to strategic optimization and capital discipline.
In terms of the trailing-12-month gross profit margin, EBR’s 59.36% is 45.3% higher than the 40.86% industry average. Likewise, its 27.04% trailing-12-month EBIT margin is 41.3% higher than the 19.13% industry average. Furthermore, the stock’s 36.65% trailing-12-month EBITDA margin is 10.9% higher than the 33.04% industry average.
EBR’s net operating revenue for the third quarter that ended September 30, 2023, increased 9.3% year-over-year to R$8.78 billion ($1.80 billion). Its gross revenue rose 7% year-over-year to R$10.60 billion ($2.17 billion).
The company’s regulatory recurring EBITDA increased 51.2% over the prior-year quarter to R$6.25 billion ($1.28 billion). Also, its consolidated net income came in at R$1.48 billion ($303.07 million), compared to a net loss of R$100 thousand ($20.48 thousand).
Street expects EBR’s revenue for the quarter ended December 31, 2023, to increase 25% year-over-year to $2.14 billion. Its EPS for the fiscal year ending December 31, 2024, is expected to increase 201.1% year-over-year to $0.54. Over the past nine months, the stock has gained 29.8% to close the last trading session at $8.45.
EBR’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #7 out of 53 stocks in the Utilities - Foreign industry. It has an A grade for Growth and a B for Quality. Click here to see EBR’s ratings for Value, Momentum, Stability, and Sentiment.
Stock #2: TransAlta Corporation (TAC)
Headquartered in Calgary, Canada, TAC engages in the development, production, and sale of electric energy. It operates through the Hydro, Wind and Solar, Gas, Energy Transition, and Energy Marketing segments.
On December 19, 2023, TAC announced the implementation of an automatic share purchase plan (ASPP) to facilitate repurchases of its common shares under the normal course issuer bid (NCIB). The ASPP, effective from January 1, 2024, allows the Company's broker to make discretionary purchases within set parameters, aiming to enhance shareholder returns through appropriate capital allocation.
On November 22, 2023, TAC and BHP Group Limited jointly announced the commercial operation of the 48 MW Northern Goldfields solar and battery storage facility, providing reliable electricity to BHP's remote nickel mining operations in Western Australia.
In terms of the trailing-12-month asset turnover ratio margin, TAC’s 0.37x is 63.1% higher than the 0.22x industry average. Likewise, its 17.18% trailing-12-month net income margin is 69.6% higher than the 10.13% industry average. Furthermore, the stock’s 73.09% trailing-12-month Return on Common Equity is 702.8% higher than the 9.10% industry average.
TAC’s revenues for the third quarter ended September 30, 2023, increased 28.7% year-over-year to CAD$2.73 billion ($2.04 billion). Its funds from operations rose 26.5% over the prior-year quarter to CAD$1.12 billion ($837.67 million). Moreover, its net income attributable to common shareholders came in at CAD$728 million ($544.49 million) and CAD$2.75 per share, up 335.9 and 343.5% year-over-year, respectively.
For fiscal 2023, TAC’s revenue is expected to increase 11.8% year-over-year to $2.46 billion. Over the past month, the stock has gained 0.5% to close the last trading session at $8.09.
TAC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary system.
It has an A grade for Sentiment and a B for Value and Quality. Within the same industry, it is ranked #2. To see TAC’s ratings for Growth, Momentum, and Stability, click here.
Stock #1: Centrica plc (CPYYY)
Based in Windsor, the United Kingdom, CPYYY operates as an integrated energy company in the United Kingdom, Ireland, Scandinavia, North America, and internationally. The company operates through British Gas Services & Solutions, British Gas Energy, Centrica Business Solutions, Bord Gáis Energy, Energy Marketing & Trading, and Upstream segments.
On November 29, 2023, CPYYY, Bord Gáis Energy, and Mitsubishi Power announced a collaboration to develop Europe's first ammonia-fired power generation facility in Cork, Ireland.
This pioneering project aims to use low-carbon ammonia as a sustainable fuel source, reducing greenhouse gas emissions and providing insights into the feasibility and scalability of this green fuel for future power generation worldwide.
In terms of the trailing-12-month EBIT margin, CPYYY’s 60.55% is 216.5% higher than the 19.13% industry average. Likewise, its 61.71% trailing-12-month EBITDA margin is 86.8% higher than the 33.04% industry average. Furthermore, the stock’s 1.13x trailing-12-month asset turnover ratio is 401.7% higher than the 0.22x industry average.
For six months ended June 30, 2023, CPYYY’s group revenue increased 60.1% year-over-year to £16.52 billion ($21.02 billion). Its adjusted earnings came in at £1.47 billion ($1.87 billion), up 128% year-over-year. Its EPS came in at 72p, compared to a loss per share of 14.7p in the year-ago quarter. Also, its adjusted EBITDA increased 38.8% year-over-year to £2.30 billion ($2.93 billion).
Analysts expect CPYYY’s revenue for the fiscal year 2023 to increase 5.6% year-over-year to $42.58 billion. Over the past year, the stock has gained 82.1% to close the last trading session at $8.12.
CPYYY’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Value and a B for Growth, Sentiment, and Quality. It is ranked first in the Utilities - Foreign industry. Click here to see CPYYY’s ratings for Momentum and Stability.
What To Do Next?
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EBR shares were trading at $8.41 per share on Tuesday afternoon, down $0.04 (-0.47%). Year-to-date, EBR has declined -2.44%, versus a -0.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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