Dive Brief:
- Wall Street analysts are debating whether a recent spike in utility stock prices has peaked, with some believing cash flooding into the sector has heightened the risk while others seeing more upside, SNL Energy reports.
- Morgan Stanley Research and UBS Securities LLC last week both issued research notes highlighting continued room to grow despite investor concerns the rally may have peaked and on risks which must be avoided.
- Consolidated Edison was highlighted as a potential risk, due to possible liability related to a gas explosion in East Harlem in 2014. SCANA Corp. was also seen as precarious, due to rising costs at to develop new units at the existing V.C. Summer nuclear plant.
Dive Insight:
SNL tackled the utility sector's recent stock rally, questioning whether security levels have peaked or if there is more upside for investors. While a recent pullback in many stocks shows the market has its doubts, a pair of investment firms say there may be room to grow if buyers can avoid some risky companies.
Morgan Stanley analyst Stephen Byrd cited the Britain's surpising vote to leave the European Union (also known as Brexit) and other developments as fueling investor uncertainty. "We believe that the significant movements in equities and fixed income provide an unusually good opportunity for value creation, given that we often see markets over- and under-correct during such periods," he wrote in a recent note.
"As all of this money comes into the utility sector, it tends to come in, in kind of a crude manner, sort of like a rising tide," Byrd added. "It just lifts all boats. And some have really underappreciated downsides, some have relatively poor growth. Then they trade at elevated multiples right along with really high quality, high growth utilities out there. "
Over at UBS, Julien-Dumoulin Smith wrote that while a recent pullback in stock prices could indicate the rally is done, "we continue to believe that as long as interest rates remain near these multi-year lows that there is still upward pressure given historical trends."
Among potential pitfalls, Morgan Stanley highlighted Consolidated Edison and SCANA Corp.
South Carolina Electric & Gas Co., SCANA's utility subsidiary, recently informed state regulators that its share of the development of two new nuclear units increased significantly, rising about $852 million to reach $7.7 billion.
SCE&G and Santee Cooper have been working for years to develop two new units at the existing V.C. Summer nuclear plant, but the project has faced delays and cost overruns. Most of the recent price increase resulted from SCE&G selecting a fixed-price option for reactor construction.
For Consolidated Edison, analysts worry the utility faces possible charges related to a deadly explosion in East Brooklyn two years ago. "And yet, ConEd trades at or above its peers right now on a P/E multiple basis and we don't think that makes sense," Byrd wrote.
According to the utility, evidence uncovered during the National Transportation Safety Board led to the conclusion that a pre-existing sewer breach beneath the roadway in front of buildings caused the gas rupture, which eventually led to the explosion.
The utility said it has since "embarked on new efforts with the City of New York to better coordinate underground infrastructure projects that will help us further accelerate our gas main replacement program, in tandem with the city’s water main replacement work."