After a solid end to last year, utility stocks have been among the weakest performers this year. However, with rate cuts expected in the near future, utility stocks are expected to become attractive to investors again. Moreover, transitioning from a petro-state to an electro-state could be a long-term tailwind for the utility sector.
However, not all utility stocks are expected to perform well. It could be wise to avoid ReNew Energy Global Plc (RNW), given its poor fundamentals. On the other hand, I think Centrica plc (CPYYY) is well-positioned to capitalize on the industry tailwinds.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the utility industry and what its long-term prospects look like:
Last year, utility stocks were among the top performers despite the various geopolitical and macroeconomic challenges. The Ukraine-Russia war led crude oil and energy prices to skyrocket. Amid high inflation and a rising interest rate environment, investors sought the safety of utility stocks as they are considered defensive in nature.
Utilities such as electricity, water, and gas are considered reliable investment options and are vital for human survival. Due to its defensive nature, the utilities sector was able to stand out last year. However, utility stocks are sensitive to interest rates. More often than not, utilities have high debt; thus, high interest rates mean higher borrowing costs.
Due to these factors, utility companies have struggled this year, as is evident from the S&P 500 Utilities’ 10.6% year-to-date decline. The high interest rates have made the dividends of utility stocks less attractive to investors compared to bond yields. Treasuries have been yielding more than the dividend yields of utilities. The yields on short-term treasury bonds with maturities of up to one year are currently above 5%.
However, the Fed will likely cut rates as soon as May next year. This could be beneficial for utility stocks. Moreover, the long-term prospects of utility companies look bright as the transition to renewable energy sources is happening sooner than expected.
Despite the significant initial investments, the shift to renewables would help utilities reduce their reliance on fossil fuels, thereby ending the volatility in their prices and profitability. The global utilities market is expected to grow at a CAGR of 6.8% to reach $8.31 trillion by 2027.
Considering these conducive trends, let’s analyze the fundamentals of the two Utilities – Foreign stocks, beginning with the second one from the investment point of view.
Stock #2: ReNew Energy Global Plc (RNW)
Based in London, the United Kingdom, RNW generates power through India's non-conventional and renewable energy sources. The company operates through two segments: Wind Power and Solar Power. It develops, builds, owns, and operates utility-scale wind and solar energy, hydro energy, and utility-scale firm power projects and distributed solar energy projects that generate energy for commercial and industrial customers.
In terms of forward Price/Book, RNW’s 2.09x is 28.3% higher than the 1.63x industry average. Its 2.21x forward Price/Sales is 13.2% higher than the 1.96x industry average. Likewise, its 8.40x forward EV/Sales is 116.6% higher than the 3.88x industry average.
RNW’s total expenses for the second quarter ended September 30, 2023, increased 9.2% year-over-year to ₹23.86 billion ($286.76 million). Its depreciation and amortization expenses rose 12.1% over the prior-year quarter to ₹4.43 billion ($53.24 million).
The company’s cash generated from operations declined 6.9% year-over-year to ₹19.16 billion ($230.27 million). In addition, its total cash and cash equivalents decreased 4.6% over the prior-year quarter to ₹24.43 billion ($293.61 million). Also, its adjusted EBITDA margin stood at 82.3%, compared to 84% in the prior-year quarter.
Street expects RNW’s revenue for the quarter ending December 31, 2023, to decline 2.7% year-over-year to $188.79 million. Also, its EPS during the same quarter is expected to remain negative. Over the past three months, the stock has gained 9.3% to close the last trading session at $6.58.
RNW’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Utilities – Foreign industry, it is ranked #47 out of 52 stocks. It has a D grade for Value. To see the additional ratings of RNW for Growth, Momentum, Stability, Sentiment, and Quality, click here.
Stock #1: Centrica plc (CPYYY)
Headquartered in Windsor, the United Kingdom, CPYYY operates as an integrated energy company in the U.K., Ireland, Scandinavia, and North America. It operates through British Gas Services & Solutions, British Gas Energy, Centrica Business Solutions, Bord Gáis Energy, Marketing & Trading, and Upstream segments. It supplies gas and electricity to residential, commercial, and industrial customers and offers energy-related services.
On April 5, 2023, CPYYY announced that it had started work on a 20MW hydrogen-ready gas-fired peaking plant in Worcestershire. The company will install eight UK-assembled containerized engines to burn natural gas at a previously decommissioned power plant in Redditch. The plant is expected to be operational later this year.
In terms of forward EV/EBITDA, CPYYY’s 1.77x is 84.3% lower than the 11.24x industry average. Its 2.28x forward EV/EBIT is 88% lower than the 19x industry average. Likewise, its 0.27x forward Price/Sales is 86.2% lower than the 1.96x industry average.
For six months ended June 30, 2023, CPYYY’s group revenue rose 60.1% year-over-year to £16.52 billion ($21 billion). Its adjustable profit attributable to owners of the parent came in at £1.47 billion ($1.87 billion), representing an increase of 128% year-over-year. The company’s adjusted operating profit increased 55.2% year-over-year to £2.08 billion ($2.64 billion).
In addition, its adjusted EBITDA increased 38.8% year-over-year to £2.30 billion ($2.92 billion). Also, its EPS came in at 72p, compared to a loss per share of 14.7p in the year-ago period.
The stock has gained 73.3% year-to-date to close the last trading session at $7.90.
CPYYY’s POWR Ratings reflect its solid prospects. 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 same industry. Click here to see the other ratings of CPYYY for Momentum and Stability.
What To Do Next?
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CPYYY shares were trading at $7.69 per share on Monday morning, down $0.21 (-2.66%). Year-to-date, CPYYY has gained 72.76%, versus a 20.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
Are ReNew Energy Global (RNW) and Centrica (CPYYY) the Right Utility Stocks for Your Portfolio? StockNews.com
