The recent slowdown in the stock market may raise the demand for “safe haven” and stable stocks including Utilities that tend to offer high dividend yields and are generally less volatile than other stocks. Is it time to reconsider investing in utility companies such as Integrys Energy Group, Inc. (NYSE:TEG) and FirstEnergy Corp. (NYSE:FE)? Let’s examine the latest developments in the electric market and determine what’s up ahead for this industry.
Electricity prices are increasing – will this trend continue?
According to the latest Energy Information Administration update, electricity prices rose in the first quarter of 2013 by roughly 1.2%. Moreover, revenue from retail sales of electricity also increased from $84.3 billion in the first quarter of 2012 to $87.4 billion in the first quarter of 2013 – a 3.6% growth. This means, part of the gain in revenue in the industry was due to price increase and part was due to rise in consumption.
The chart below shows the developments in electricity prices in the past several years.
Let’s turn to several Utilities companies and see if they have done better or worse than the industry’s average.
Are utilities stocks still worth having?
In the recent quarter, FirstEnergy Corp. (NYSE:FE) maintained its profit margin stable at 21%, which is the same as in the first quarter of 2012. But, Duke Energy Corp (NYSE:DUK) and Integrys Energy Group, Inc. (NYSE:TEG) had a rise in profit margin in the first quarter of 2013 to 18% and 17%, respectively.
Revenue of FirstEnergy Corp. (NYSE:FE) fell 8.6% in the first quarter of 2013 (year-over-year). Integrys Energy’s revenue rose 34% in the first quarter of 2013. Most of the growth in sales was attributed to the spike in the natural gas utility segment. The hotter than normal winter that was recorded in 2012 made this year’s winter augment the demand for natural gas.
Duke Energy Corp (NYSE:DUK)’s net sales also sharply pulled up 62.5% in the first quarter. Most of the rise in revenue was due to the sharp gain in heating degrees, which according to the company’s quarterly report, rose by 35% to 49%, depending on Duke’s subsidiaries.
Thus, FirstEnergy Corp. (NYSE:FE) hasn’t augmented its revenue in the first quarter of 2013; Duke Energy Corp (NYSE:DUK) and Integrys Energy Group, Inc. (NYSE:TEG)had a sharp increase in revenues, partly related to the demand for natural gas (for Integrys). Looking forward, will these companies continue to see such a sharp rise in revenues? In order to answer this question, let’s turn to the estimated future developments in the electricity market including price and consumption for the rest of 2013.
The recent rise in profit margin may have been partly driven by the rise in electric prices in the first quarter of 2013 compared to the same time in 2012. But, the EIA projects the demand for electricity will dwindle in this summer compared to last year’s summer, which was hotter than normal. This means, in the coming months, the price of electricity will be lower compared to 2012. Nonetheless, the EIA estimates total consumption in the U.S. is expected to rise 1.3% in 2013 (year-over-year) on account of a 0.4% gain in consumption and 0.7% population growth.
The price of electricity is projected to rise by 1.1% in 2013 compared to 2012. Therefore, the revenue of an average company will rise roughly by 2.4% in 2013. This benchmark is something worth remembering for evaluating the above mentioned companies in the coming quarters.
Nonetheless, since the EIA projects last year’s hotter than normal summer won’t repeat this year, this will bring down not only electricity prices, but also consumption in the coming months (compared to last year). Therefore, we might see a drop in revenue growth of the above-mentioned companies. Duke Energy Corp (NYSE:DUK) and Integrys Energy Group, Inc. (NYSE:TEG), unlike FirstEnergy Corp. (NYSE:FE), recorded sharp gains in the first quarter of 2013; thus, they are likely to finish 2013 with an increase in revenue compared to 2012, even if revenue will be lower in the coming quarters compared to last year.