Analysts expect uneven Q4'21 earnings growth across US gas utilities

Wall Street anticipates another round of mixed earnings from U.S. natural gas utilities, potentially telegraphing lackluster EPS growth for the group.

Analysts expect only five out of nine gas utility operators to report year-over-year EPS increases for the final quarter of 2021, according to S&P Capital IQ consensus estimates. If these expectations prove true, it would continue a trend: Just two of the companies topped year-ago earnings in the previous reporting period, while five posted improved quarterly EPS for the quarter prior to that.

Gas utility stocks outperform despite soft EPS growth

The companies tipped to grow EPS include both pure-play gas distributors and more diversified operators: Atmos Energy Corp., One Gas Inc., New Jersey Resources Corp., Chesapeake Utilities Corp. and UGI Corp. Those forecast to report year-over-year declines are Northwest Natural Holding Co., South Jersey Industries Inc., Spire Inc. and Southwest Gas Holdings Inc.

Despite the general slump of the last few quarters, which followed a strong run of EPS growth, investors have gravitated to the space. A supportive backdrop for defensive stock sectors, along with attractive valuations for gas utility shares, helped an index of the nine gas utilities outperform the broader market in the final quarter of 2021.

This performance has continued in 2022 amid a market rout driven by inflation and expectations that the U.S. Federal Reserve will more aggressively hike interest rates to tame rising prices.

Analysts see electric utilities generating better returns

While investment banks expect gas distributor stocks to continue trading at a discount to shares of electric utilities, they have been taking a brighter view of the latter group. In a Jan. 20 research note, Guggenheim Securities LLC said it is "largely on the sidelines with the entire group given better return opportunities with electric counterparts."

Bank of America Securities Inc. also expected gas utilities' valuation discount to persist, but it saw the discount narrowing in 2022 as concerns ease around high natural gas prices, recovery of 2021 winter storm costs, and diminishing investment opportunities resulting from building electrification and decarbonization policy, the firm said in a Jan. 4 research note.

In the upcoming reporting period, expectations are split for multi-utilities. Analysts expect seven out of 14 companies with comparable data to post year-over-year EPS growth, six to report a decline and one to announce flat earnings.

Earnings season for gas utilities begins the week of Jan. 30 and extends throughout much of February.