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Will Cost Overruns Mar Southern Company's (SO) Q3 Earnings?

Electric utility firm Southern Company SO is set to release third-quarter 2017 results before the opening bell on Nov 1.

In the preceding three-month period, the Atlanta, GA-based service provider delivered better-than-expected earnings courtesy of Southern Company Gas’ robust performance (acquired in July 2016). Southern Company delivered an average positive earnings surprise of 0.86% in the last four quarters.

Let’s see how things are shaping up for this announcement. 

Factors to Consider

The utility sector is capital intensive. These companies need huge capital to set up generation facilities, and transmission and distribution infrastructure. They also require considerable funds to maintain and upgrade the existing systems in order to meet emission-control standards. As such, we are concerned of the company’s high leverage which restricts its financial flexibility. The company currently carries a debt-to-capitalization ratio of around 63%. The increased spending of the company is also posing problems to its liquidity metrics. Last quarter, Southern Company’s operating expenses were higher by around 18.3%. If the trend persists, the company’s earnings are expected to get hurt.

Prolonged delays and cost overrun issues over the company’s two major construction projects — Vogtle and Kemper — are likely to adversely affect Southern Company’s results this earnings season. The Vogtle project is being bankrolled with more than $8 billion in federal loans and loan guarantees, which is likely to deteriorate the company’s credit metrics. Additionally, the increasing capital intensity of operations may result in reduced returns. The Kemper project is also facing much criticism, with its cost ballooning over $7.3 billion from an earlier estimated figure of $3 billion in 2010. Project management problems have pushed the plant three years behind schedule already.

Further, with tepid customer growth, sales are likely to get affected. As it is, the company’s sales during the last few years have declined due to the impact of fluctuating weather conditions on overall consumer demand. Last quarter, commercial, residential and industrial sales of Southern Company were down by 0.8%, 2.9% and 0.8%, respectively year over year. The trend is likely to linger in the near term.

Moreover, the Zacks Consensus Estimate for 2017 earnings for the current quarter has been revised downward by 4.4% over the last seven days.

Earnings Whispers

Our proven model does not conclusively show that Southern Company is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -0.23%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter

Zacks Rank: Southern Company presently carries a Zacks Rank #4 (Sell). Please note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks with Favorable Combination

Though an earnings beat looks uncertain for Southern Company, here are some firms from the energy space you may want to consider as our model shows that these have the right combination of elements to post earnings beat:

Noble Midstream Partners LP NBLX has an Earnings ESP of +10.48% and sports a Zacks Rank #1. The partnership is likely to report third-quarter earnings numbers on Oct 30.You can see the complete list of today’s Zacks #1 Rank stocks here.

Canadian Natural Resources Limited CNQ has an Earnings ESP of +7.46% and carries a Zacks Rank #2.The company is expected to release third-quarter earnings report on Nov 2.

Andeavor ANDV has an Earnings ESP of +5.02% and carries a Zacks Rank #3. The company is expected to release third-quarter earnings results on Nov 8.

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