The utilities sector comprises companies that provide electricity, natural gas, water, and wastewater services to different customers, including residential, commercial, industrial, and government. Notably, the global utilities market is expected to hit almost $6 trillion by 2025, growing at a CAGR of 7% during the forecasting period, the Research and Markets report.
The utilities sector tends to provide stable returns during different business cycles due to inelastic demand for its services. This can be evidenced by the Utilities Select Sector SPDR ETF (XLU) 6.35% returns since the beginning of the year, compared to the SPDR S&P 500 Trust ETF (SPY) 13.07% decrease over the same period.
With this in mind, today, today I will analyze and compare two utility stocks, PG&E Corporation (PCG) and NextEra Energy, Inc. (NEE), to see which is presently a better buy.
Based in San Francisco, California, PG&E is a company that sells and delivers electricity and natural gas to customers in northern and central California, the United States. Founded in 1925, NextEra Energy also generates, transmits, distributes, and sells electric power to retail and wholesale customers in the US.
Year-To-Date (YTD), PCG has risen 1.73%, while NEE has lost 17% over the same period.
Recent News
On April 25th, Nicholas Campanella, an analyst from Credit Suisse, initiated coverage of PG&E Corporation with an "Outperform" rating. The analyst noted that the company has been taking steps to improve its wildfire operational risk and ultimately restore confidence with both investors and customers since Chapter 11 bankruptcy in the summer of 2020. Therefore, Campanella believes that PG&E offers "compelling value" at the moment. The firm established a price target of $17 on PCG.
Recent Financial Performance & Analysts' Estimates
On April 28th, PG&E Corporation issued an earnings report for the first quarter of 2022. In Q1, the company's top line rose 22.7% on a year-over-year basis to $5.79 billion. This revenue growth was driven by higher electric and natural gas operating revenues. Consequently, PG&E Corporation surpassed Wall Street's revenue estimates by $640 million.
Furthermore, the company’s net income has been reported at $530 million compared to its year-ago value of $177 million. As a result, PCG reported a Non-GAAP EPS of $0.30, beating Wall Street expectations by $0.05.
For the second quarter, the analysts expect PG&E's EPS to be $0.30, which is a 10.54% year-over-year increase. Besides, a $5.72 billion average revenue projection for FQ2 indicates a steady 9.60% YoY growth.
For its fiscal first quarter ended March 31st, 2022, NextEra Energy's total operating revenues deteriorated 22.5% year-over-year to $2.89 billion, missing Wall Street's revenue consensus by $2.27 billion. The company's first-quarter net loss stood at $451 million versus a net income of $1.67 billion in a year-ago quarter, leading to a lower-than-expected GAAP EPS of ($0.23).
On the positive front, NEE should reward its shareholders with an annual dividend payout of $1.70 a share, translating into a forward yield of 2.20%, however, below the sector’s median threshold of 3.08%.
Currently, Wall Street analysts estimate NEE's EPS to rise 2.67% year-over-year in the second quarter to $0.73 per share. Following the same trend, analysts expect that its FQ2 revenue will advance 34.42% YoY to $5.28 billion.
Comparative Valuation
In terms of P/E TTM, NEE is currently trading at 29.67x, which is significantly higher than PCG, whose multiple is currently standing at 11.33x. In addition, PCG's P/E TTM multiple looks undervalued compared to the sector's median of 21.71x.
When it comes to the Forward EV/EBITDA multiple, NEE's EV/EBITDA multiple of 17.67x is considerably higher than PCG's 8.95x and the sector's median of 12.16x
Finally, PCG's P/CF FWD of 3.76x is significantly lower than NEE's 15.37x. PCG also looks cheap compared to the sector's median of 9.07x.
Conclusion
While both utility companies should continue to generate stable revenues due to highly inelastic demand for their services, I believe that PG&E Corporation is presently a better investment based on its strong financials, favorable analyst coverage, promising growth prospects, and cheap valuation.
PCG shares were trading at $12.24 per share on Tuesday morning, down $0.11 (-0.89%). Year-to-date, PCG has gained 0.82%, versus a -12.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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