Cleaner forms of energy production are anticipated to fuel utility capital expenditures in the upcoming years. Furthermore, the demand for utilities typically remains strong even in the face of changes in the economic landscape.
Considering this, it could be wise to investments in fundamentally sound utility stocks Veolia Environnement SA (VEOEY), TransAlta Corporation (TAC) and Empresa Distribuidora y Comercializadora Norte Sociedad Anónima (EDN), which are currently trading at a discount. Let’s understand this in detail.
The transition toward renewable energy sources is pivoting around utilities as their epicenter. Technological advancements and amplified economies of scale have rendered generating energy from renewables more cost-effective than fossil fuels. Consequently, this paradigm shift is propelling substantial expansion within the global utility sector.
For instance, the surging popularity and adoption of Electric Vehicles (EVs) are conferring significant advantages upon the industry. Their increasing demand is bolstering heightened electricity requisites, thereby catalyzing grid infrastructure investments.
The efforts of consumers, businesses, and governments to diminish their carbon footprints are further driving robust revenue expansion for utilities. According to sustainable development consultancy Arup and economics advisory firm Oxford Economics, industries aiding the shift to global net-zero emissions could be worth $10.3 trillion by 2050.
Additionally, the utilities sector's stability and maturity stem from unwavering demand for vital services, resilient even during economic shifts. This could serve as a safeguard against macroeconomic challenges and headwinds.
Looking forward, a Research and Markets report projects the global utilities market to grow at a CAGR of 6.8% and reach $8.31 trillion by 2027.
Considering the positive global outlook for the utility industry, let's take a closer look at foreign utility stocks VEOEY, TAC, and EDN to examine what makes them worthwhile investments.
Veolia Environnement SA (VEOEY)
VEOEY, headquartered in Aubervilliers, France, is an optimized resource management group that offers water, waste, and energy management solutions. The Group's geographical segments include France; Europe excluding France; Rest of the World; Global Businesses; and Other, including the various Group holding companies.
On June 14, VEOEY announced that it will head, through its subsidiary SIDEM, a consortium in charge of Engineering, Procurement, and Construction (EPC) on the Mirfa 2 desalination project commissioned by Abu Dhabi National Energy Company PJSC (TAQA) and ENGIE.
This cutting-edge Reverse Osmosis Desalination (M2 RO) facility in Abu Dhabi, set to become UAE's third-largest, is expected to yield approximately €300 million ($325.39 million) in revenue for VEOEY. This should strengthen the company's global position and underline its capabilities in state-of-the-art infrastructure development.
In terms of forward non-GAAP PEG, VEOEY is trading at 2.35x, 9.7% lower than its industry average of 2.60x. Its forward EV/Sales of 0.93x is 74.5% lower than the 3.63x industry average. Moreover, its forward EV/EBITDA of 6.30x compares to the industry average of 11.21x.
For the six months that ended June 30, 2023, VEOEY’s revenue increased 12.7% year-over-year to €22.76 billion ($24.68 billion). Its net income and net income per share attributable to the owners of the company rose 121.6% and 118.2% year-over-year to €522.90 million ($567.15 million) and €0.72, respectively.
In addition, as of June 30, 2023, the company’s non-current assets stood at $44.60 billion ($48.38 billion), compared to $44.59 billion ($48.36 billion) as of December 31, 2022.
The consensus revenue estimate of $48.18 billion for the fiscal year ending December 2023 reflects a 6% rise year-over-year. Likewise, the consensus EPS estimate of $0.55 for the current year indicates a 35% year-over-year improvement. Moreover, the company surpassed the consensus revenue estimates in three of four trailing quarters.
VEOEY’s shares have gained 32% over the past year to close the last trading session at $15.22.
VEOEY’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
VEOEY has a B grade for Growth, Value, and Stability. It is ranked #7 in the 55-stock Utilities - Foreign industry.
In addition to the POWR Ratings I’ve just highlighted, you can see VEOEY’s ratings for Sentiment, Momentum, and Quality here.
TransAlta Corporation (TAC)
Based in Calgary, Canada, TAC is a power generation company that owns, operates, and oversees a diverse asset portfolio, amounting to around 7,387 megawatts (MW) of capacity. Its energy sources encompass water, wind, solar, natural gas, and thermal coal. The company's segments include Generation and Energy Marketing.
On July 11, TAC and TransAlta Renewables Inc. (RNW) announced their definitive arrangement agreement, wherein TAC would acquire all outstanding common shares of RNW not already held by TAC and its affiliates, pending RNW shareholders' approval.
The agreement is expected to augment TAC's economic prospects with an additional 1,187 MW of generating capacity, equivalent to 39.9% of RNW's non-TAC-owned capacity. Moreover, it would bolster TAC's contractual commitments and diversify the effects of its exposure to merchant markets.
In terms of forward non-GAAP P/E, the stock is trading at 6.01x, 64.6% lower than its industry average of 16.97x. Its forward EV/Sales of 2.67x is 26.5% lower than the 3.63x industry average. Also, TAC’s forward EV/EBITDA of 4.91x is 56.1% lower than the 11.21x industry average.
During the second quarter that ended June 30, 2023, TAC’s revenues increased 36.5% year-over-year to CAD 625 million ($461.32 million). Its adjusted EBITDA grew 38.7% from the year-ago value to CAD 387 million ($285.65 million). Also, the company’s FFO rose 77.7% from the prior year’s quarter to CAD 391 million ($288.60 million).
In addition, net earnings and net earnings per share attributable to common shareholders came in at CAD 62 million ($45.76 million) and CAD 0.23, compared to a loss and loss per share of CAD 80 million ($59.05 million) and CAD 0.30, in the prior year’s quarter, respectively.
For the fiscal year ending December 2023, analysts expect TAC’s revenue to increase 8.4% year-over-year to $2.38 billion. The company’s EPS for the ongoing year is expected to grow significantly from the prior year to $1.46. Moreover, the company’s EPS is projected to grow 12.5% per annum for the next five years.
The stock has gained 15.4% over the past six months, closing the last trading session at $9.92.
TAC’s strong prospects are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
TAC has an A grade for Sentiment and a B for Value and Quality. It is ranked #2 in the 55-stock Utilities – Foreign industry.
Click here to access the additional TAC ratings (Growth, Momentum, and Stability).
Empresa Distribuidora y Comercializadora Norte Sociedad Anónima (EDN)
Headquartered in Buenos Aires, Argentina, EDN focuses on electricity distribution within the country. The company's concession area spans about 4,637 square kilometers, divided into three operational zones: Region I (251 sq. km), Region II (around 1,761 sq. km), and Region III (over 2,625 sq. km).
In terms of forward EV/Sales, EDN is trading at 0.73x, 80% lower than its industry average of 3.63x. Its forward EV/EBITDA of 6.26x is 44.2% lower than the 11.21x industry average. Moreover, its forward Price/Sales of 0.77x compares to the industry average of 1.99x.
For the second quarter that ended June 30, 2023, EDN’s revenue increased 16.3% year-over-year to ARS 91.94 billion ($262.71 million). Its gross margin stood at ARS 4.07 billion ($11.63 million), compared to a loss of ARS 714 million ($2.04 million) in the prior year’s period.
Also, the company’s cash inflow financing activities came in at ARS 6.16 billion ($17.61 million), compared to a cash outflow of ARS 8.10 billion ($23.14 million) in the prior year’s period. As of June 30, 2023, the company’s cash and cash equivalents stood at ARS 4.32 billion ($12.34 million), compared to ARS 2.46 billion ($7.02 million) as of December 31, 2022.
The company’s revenue for the fiscal year ending December 2023 is expected to increase 59.3% year-over-year to $1.63 billion. Similarly, analysts expect EDN’s revenue for the next fiscal year to come in at $2.87 billion, up 75.4% from the previous year. Also, the company surpassed the consensus revenue estimates in three of the trailing four quarters.
Over the past year, the stock has gained 100.9%, closing the last trading session at $13.90.
EDN’s positive outlook is apparent in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
EDN has an A grade for Sentiment and a B for Value. It is ranked #8 out of 55 stocks within the same industry.
Click here to access additional EDN ratings for Growth, Stability, Momentum, and Quality.
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VEOEY shares were trading at $15.07 per share on Thursday morning, down $0.15 (-0.99%). Year-to-date, VEOEY has gained 20.72%, versus a 16.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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