Given the current confluence of economic headwinds, the utilities sector’s defensive characteristics continue to look attractive to investors. Moreover, the industry’s long-term growth and expansion are even more compelling as utility companies are well-positioned to reap value from opportunities created by the growing adoption of clean energy worldwide.
Considering the industry’s defensive nature and long-term rosy prospects, fundamentally strong utility stocks E.ON SE (EONGY), Engie Brasil Energia S.A. (EGIEY), and Enagás, S.A. (ENGGY) could be valuable additions to your portfolio now.
In July, the consumer price index (CPI) rose 3.2% year-over-year, slightly below the 3.3% forecast but higher than June’s 3% and the first increase in more than a year. While inflation has come well off its 40-year highs of mid-2022, it is still well above the Fed’s 2% target.
Last month, the central bank raised interest rates by 0.25%, lifting the fed funds rate to a target range of 5.25%-5.5%, the highest level in 22 years. Further, Fed minutes released last Wednesday from the most recent meeting showed that Fed officials expressed concerns about the pace of inflation and said more rate hikes could be required.
Growing rate hike concerns and other macroeconomic headwinds will likely keep the stock market volatile. The utilities sector’s defensive nature looks appealing to investors seeking shelter during market and economic choppiness. Utilities like water, gas, and electricity are necessities for people during all phases of the economic cycle.
Furthermore, the utilities industry’s long-term outlook appears bright due to the rapid growth in investments in renewable power generation capabilities. Also, governments worldwide are promoting renewable energy sources by offering attractive incentives and funding.
The Inflation Reduction Act (IRA) spurred massive U.S. investments in clean energy. The act allocates more than $369 billion to grant and loan programs and other incentives intended to boost the transition to a clean energy economy. The IRA also incorporates about two dozen tax provisions specifically designed to save families money on their energy bills.
According to a report by The Business Research Company, the global utilities market size is expected to reach $8.31 billion in 2027, growing at a CAGR of 6.8%.
Against this backdrop, fundamentally sound utility stocks EONGY, EGIEY, and ENGGY could be worth adding to your portfolio. These stocks are rated B (Buy) in our POWR Ratings system.
Let’s delve deeper into the fundamentals of these stocks:
E.ON SE (EONGY)
EONGY, headquartered in Essen, Germany, is an energy company that operates in Germany, the United Kingdom, Sweden, the Netherlands, and the rest of Europe. The company’s two main segments include Energy Networks and Customer Solutions. Also, it provides innovative software and solutions, such as SmartSim, GasPro, and GasCalc.
Yesterday, EONGY and FPT Software announced a partnership, eyeing offshore delivery opportunities by opening an offshore development center (ODC) in Vietnam in fields such as SAP, DevOps, Data Analytics, AI. The future ODC is expected to help EONGY diversify its delivery locations to ensure business resilience and agility.
Following a solid financial performance in the fiscal 2023 first half, EONGY raised its full-year earnings outlook. The company now expects an adjusted EBITDA of €8.60 to €8.80 billion ($9.33 to $9.54 billion). Its adjusted net income and earnings per share are expected to be between €2.70-€2.90 billion ($2.93-$3.15 billion) and €1.03-€1.11, respectively.
For the first six months of fiscal 2023, EONGY’s adjusted EBITDA increased 39.6% year-over-year to €5.67 billion ($6.15 billion). Its adjusted EBIT came in at €4.28 billion ($4.64 billion), up 59.8% year-over-year. In addition, the company’s adjusted net income grew 63.3% and 63% from the prior-year period to €2.31 billion ($2.51 billion) and €0.88 per share, respectively.
The consensus revenue estimate of $136.55 billion for the fiscal year (ending December 2023) represents an 11.6% increase year-over-year. The consensus EPS estimate of $1.26 for the same period indicates a 22.6% improvement year-over-year.
Over the past year, EONGY’s stock has gained 36.5% and 20.3% year-to-date to close the last trading session at $12.23.
EONGY’s POWR Ratings reflect this promising outlook. The company has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
EONGY has a B grade for Value and Stability. Out of the 55 stocks in the Utilities-Foreign industry, it is ranked #11.
To see the other ratings of EONGY for Momentum, Quality, Sentiment, and Growth, click here.
Engie Brasil Energia S.A. (EGIEY)
Headquartered in Florianópolis, Brazil, EGIEY generates, sells, and trades electrical energy. The company manages nearly 68 power plants, including hydroelectric, thermal, wind, biomass, photovoltaic solar, and small hydroelectric, distributed across 21 states in Brazil. Also, it transports natural gas through approximately 4,500 km of gas pipelines nationwide.
On July 3, EGIEY won a new concession to construct and operate 1,000 km of transmission lines in the States of Bahia, Minas Gerais, and Espírito Santo, meeting the demand for the flow of energy generated by renewable sources in the Northeast Region to the Southeast region. This deal would strengthen the company’s power transmission activity.
Cécile Prévieu, EGIEY’s Executive Vice President in charge of Networks activities, said, “While contributing to the security of supply and resilience of the country’s energy system, this project will also enable better integration of renewable energies, thereby helping to accelerate the energy transition.”
On June 20, EGIEY and Meridiam signed a Sales and Purchase Agreement with ACTIS to acquire BTE Renewables, a developer, owner, and operator of renewable assets on the African continent, with an operating presence in South Africa and Kenya.
The acquisition of BTE would bring an additional 340 MW of renewable energy capacity to EGIEY, a portfolio of more than 3 GW of advanced development projects in a growing renewables market, and a team of about 80 recognized professionals.
This agreement might further strengthen the company’s presence in South Africa, capitalizing on the Group’s industrial value.
For the second quarter of 2023, EGIEY’s EBIT increased 1.5% year-over-year to R$1.48 billion ($301.51 million). The company’s adjusted net income rose 56.8% from the year-ago value to R$806 million ($164.20 million). Furthermore, EGIEY’s net debt came in at R$13.89 billion ($2.83 billion), down 15% from the prior year’s quarter.
Analysts expect EGIEY’s revenue for the third quarter (ending September 2023) to increase 3.2% year-over-year to $550.35 million. EGIEY’s stock gained 15.8% over the past six months and 27.7% year-to-date to close the last trading session at $8.81.
EGIEY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
EGIEY has a B grade for Stability and Quality. Out of the 55 stocks in the Utilities-Foreign industry, it is ranked #15.
To see the other ratings of EGIEY for Sentiment, Growth, Value, and Momentum, click here.
Enagás, S.A. (ENGGY)
Based in Madrid, Spain, ENGGY specializes in developing, operating, and maintaining gas infrastructures internationally. The company offers gas transmission and natural gas regasification services and operates underground storage facilities. It operates through three segments: Gas Transmission; Regasification; and Storage of Gas.
On June 1, it was announced that ENGGY would join as an individual partner of Hanseatic Energy Hub GmbH (HEH) in a consortium comprising the founding shareholder, Buss Group based in Hamburg, Partners Group, and the industrial partner, Dow, with Enagás holding a 10% ownership stake.
This project aims to develop a flexible modular system for the transition to green energy in the Stade industrial park, where Dow already produces hydrogen on a large scale. HEH’s planned investment volume for the terminal is around €1 billion ($1.08 billion). This partnership should bode well for ENGGY.
Also, on January 26, ENGGY, through Enagás Internacional S.L.U., entered an agreement with the Swiss company Axpo to purchase 4% of Trans Adriatic Pipeline (TAP) for €168 million ($182.22 million), in addition to the 16% previously held. Following the closing of the transaction, TAP’s shareholding would be 20% owned by Enagás.
During the first six months ended June 30, 2023, ENGGY’s net financial gain was €1.02 million ($1.11 million), compared to a net financial loss of €170.66 million ($185.10 million) in the prior-year period. Its profit before tax from continuing operations grew 248.5% from the year-ago value to €217.43 million ($235.83 million).
Furthermore, The company’s profit for the year from continuing operations increased 481% year-over-year to €177.17 million ($192.16 million), and its earnings per share were €0.68, up 466.7% year-over-year. As of June 30, 2023, its current assets and total assets stood at €1.31 billion ($1.42 billion) and €8.64 billion ($9.37 billion), respectively.
Street expects ENGGY’s revenue for the third quarter (ending September 2023) to increase 6.1% year-over-year to $250.18 million. Likewise, the company’s revenue for the fourth quarter (ending December 2023) is expected to grow 1.2% year-over-year to $274.02 million.
Shares of ENGGY have gained 1.2% year-to-date to close the last trading session at $8.34.
ENGGY’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
ENGGY has a B grade for Momentum, Stability, and Quality. It is ranked #12 out of 55 stocks in the Utilities-Foreign industry.
In addition to the POWR Ratings we’ve stated above, we also have ENGGY ratings for Sentiment, Value, and Growth. Get all ENGGY ratings here.
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EONGY shares were trading at $12.21 per share on Thursday morning, down $0.02 (-0.16%). Year-to-date, EONGY has gained 27.43%, versus a 16.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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