DCF Utility Valuation: Still the Gold Standard?
Electric utility stocks bottomed out in 1999. It's up to managers to lead a rally.
The allure of technology stocks and rising interest rates combined to make 1999 the worst year for electric utility stocks since 1974, according to market analysts. But they see upside potential in the under-performance of these stocks, and say utility managers can play a role in attracting investors.
"I think what the utilities need to do is make a little more noise about how cheap their stocks are, and they should step up their investor relations efforts and do more visits directly to institutional investors," says Barry Abramson, CFA, managing director, electric utilities, at PaineWebber Equity Research. "It's up to them to make the effort, but we think the effort would pay off."
"People view the tech sector as essentially riskless, all it can do is go up, and we know that's not true," adds David E. Parker, senior vice president of research at investment firm Robert W. Baird & Co. Inc.
He agrees that utilities need to be more active in promoting themselves to investors. "I think investors are waiting for some good new ideas from utility managements, and I'll tell you that I'm a little frustrated that we're not seeing a lot in terms of market innovation."
Says Parker, "Growth rates are increasing now and capacity shortages are there so you have supply and demand working in our favor. I think the ball, to a degree, is in the utility manager's court now. I think they've got to start proving they can surprise on the upside and not necessarily always be pointing fingers at everyone else about why innovation won't work."
Deregulation of electric markets also may have positive impacts, according to analysts.
Parker explains, "It's forced companies to make some tough decisions and, in most cases, state regulators and legislators have offered investors a fair return on investment."
Abramson points to the strong financial position of electric utilities as an encouraging factor.
"Earnings seem to be growing faster, and companies have an enormous amount of free cash flow [that they're using] to enhance earnings," he says. "Once they're able to make that transition [to competition] with this strong financial base, we think they're going to do relatively well."
Adds Parker, "New influences, new money, new investors, new management teams are going to help shape the way this industry is going to go in the next 10 or 20 years. I think that's all going to be productive because the fundamentals here look very good and the stocks [can't] go anyplace but up."
Regina R. Johnson is managing editor of Public Utilities Fortnightly.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.