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Utility Stocks Poised for Q1 Earnings Beats amid Market Chaos

The start of the first quarter earnings season sees a negative investor sentiment given the lackluster earnings outlook. Add to this global growth concerns, China weakness and volatility in commodity prices and you know why it’s so difficult to find winners this earnings season.
 
Data on the U.S. economy has been mostly mixed. The jobs market looks good with a declining unemployment rate and there has been a moderate expansion in consumer spending while the housing market is on its recovery trail. But offsetting the positives are declines in manufacturing and net exports owing to slow global growth. The significant appreciation of the dollar against other currencies can’t be ignored either.

Quite tellingly, U.S. economic growth came to a standstill in Q1, per Atlanta Fed's GDPNow model. It now shows Q1 GDP growth of just 0.1%, down from an earlier estimate of 0.4%.
 
Hedge Against Uncertainty
 
Given the gyrations in the stock market, selecting utility stocks would be a sensible choice largely due to the sector’s defensive characteristics. Moreover, the dovish approach of the Federal Reserve to rate hikes makes utility stocks even more attractive. The Fed kept the short-term interest rate steady in the 0.25–0.50% band and indicated that only two rate hikes are likely for the year.

The utility sector is expected to benefit from a low-rate scenario in the near term, as higher rates would have raised their financing costs and reduced their plea as dividend investments. The sector is a safe haven providing investors with steady returns in a volatile market.

In fact, the Dow Jones Utility Average index gained 13.91% year to date compared with a 2.77% gain for the Dow. This is mostly a reflection of Fed's assurance that future interest-rate increases will be gradual.
 
Utility Strengths
 
The combination of steady electricity price gains and stable-to-improving demand is expected to drive the utility sector. A decline in the unemployment rate, increase in hourly earnings of average workers and higher demand in residential and other customer classes are tailwinds for the utilities.
 
Importantly, the more or less stable earnings trend of the utilities is a net positive. The regulated nature of their operations provides stability to future earnings stream. These operators in turn reward their shareholders through the payment of sustainable dividends and share buybacks. This was evident even during the economic crisis of 2008–2009 when utilities continued to pay dividends without fail. Regular dividend payers are often regarded as a “bond substitute“ and consistently performing utilities continue to be a safe investment option for jittery investors.
 
The case for investing in utility stocks looks good in these turbulent times as they have very low correlation to the markets. So, it is a profitable strategy to zero in on a handful of utility names that are poised to beat earnings estimates this quarter. An earnings beat would also pave the way for stock price appreciation.
 
How to Pick?
 
Though utilities on the whole are expected to do increasingly well this year, it is also important to pick the right stocks. One way to confine the list of choices during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP is usually an indication of an earnings beat.
 
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

For investors seeking to apply this strategy to their portfolio, we have highlighted four utility stocks that may stand out this season. 
 
Our Choices
 
Calpine Corp. (CPN)
 
Houston, TX-based Calpine is a wholesale power generation player. The company is the owner and operator of North America based natural gas-fired and geothermal power units.
 
During the quarter, the company purchased Granite Ridge Energy Center, a natural gas-fired, combined-cycle power plant located in Londonderry, NH, approximately 45 miles northwest of Boston.
 
Calpine has a fleet of 84 power plants in operation or under construction representing more than 27,000 megawatts of generation capacity. Through wholesale power operations and its retail business, Champion Energy, it serves customers in 20 states and Canada. The addition of Granite Ridge strategically boosted its footprint in New England.
 
This Zacks Rank #3 company is expected to report first-quarter earnings on Apr 29.
 
It has an Earnings ESP +30.77% and the stock has gained 3.04% year to date.
 
PG&E Corporation (PCG)
 
PG&E Corporation, based out of San Francisco, CA, is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company (Pacific Gas). The company served nearly 5.3 million electric and 4.4 million natural gas customers as of Dec 31, 2015.
 
The company’s ongoing investments in infrastructure improvement and the addition of assets will enable it to serve a wider customer base. Apart from its investments in growth projects, a stable financial position allows PG&E Corp. to pay regular dividends. In 2015, the company distributed $856 million as common stock dividends, up 3.4% from the year-ago payout. PG&E shareholders are paid a 3.07% dividend. The stock has gained 10.6% year to date.
 
PG&E Corporation has a Zacks Rank #3 and an Earnings ESP of +1.25%. The company surpassed expectations in three out of the last four quarters, with an average beat of 12.13%.
 
PG&E Corporation will announce first-quarter 2016 results before the market opens on May 4.
 
Dominion Resources, Inc. (D)
 
Dominion Resources is one of the nation’s largest producers and transporters of energy, with a portfolio of approximately 24,300 megawatts of generation and 6,500 miles of electric transmission lines. Dominion operates one of the nation’s largest natural gas storage systems, with 933 billion cubic feet of storage capacity, and serves utility and retail energy customers in 14 states. Moreover, Dominion Resources has emerged as a big name for having a large-scale renewable generation portfolio. 
 
Dominion continues to focus on maximizing shareholder wealth through regular dividend payments. The dividend payout target of the company is 70% to 75% of its operating earnings and investors are paid a solid 3.83% dividend. 
 
Dominion Resources has a Zacks Rank #3 and an Earnings ESP of +3.06%. The share price climbed 7.63% so far this year.
 
Dominion Resources will announce first-quarter 2016 results before the market opens on May 4.
 
Pinnacle West Capital Corporation (PNW
 
Pinnacle West’s subsidiary, Arizona Public Service, is the largest and longest-serving electric utility provider in Arizona. The state is witnessing a gradual economic recovery fueled by a rapidly developing Phoenix Metropolitan Area, where jobs grew at a year-over-year rate of 2.8% in the fourth quarter of 2015. Single-family housing permits grew roughly 50% in 2015 compared to 2014.
 
Pinnacle West believes that 2016 has better growth prospects in terms of jobs, income, consumer spending and commercial and residential settlements. Its retail customer base is expected to grow about 2–3% annually. 

Pinnacle West has a Zacks Rank #2 and an Earnings ESP of +14.29%. The stock clocked up gains of 15.14% so far this year and its investors are paid an impressive 3.35% dividend.

Pinnacle West will announce first-quarter 2016 results before the market opens on Apr 29.
 
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
CALPINE CORP (CPN): Free Stock Analysis Report
 
PG&E CORP (PCG): Free Stock Analysis Report
 
DOMINION RES VA (D): Free Stock Analysis Report
 
PINNACLE WEST (PNW): Free Stock Analysis Report
 
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