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Wall Street sees gas utilities growing earnings as sector remains undervalued

Stock analysts are expecting another positive quarter for natural gas utility earnings, with consensus forming that the utility sector is undervalued and environmental, social and governance concerns are overdone.

Six out of nine gas utilities are expected to post higher fourth-quarter 2020 EPS than during the prior-year calendar period, according to S&P Capital IQ consensus estimates. The gainers include Atmos Energy Corp., One Gas Inc., Southwest Gas Holdings Inc., New Jersey Resources Corp., Chesapeake Utilities Corp. and Northwest Natural Holding Co.

UGI Corp. is tipped to match year-ago earnings, while EPS is seen falling at Spire Inc. and South Jersey Industries Inc. Wall Street expects revenues to rise year over year at each company except New Jersey Resources.

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The results telegraph another strong earnings period for gas utilities. All nine names in the select group matched or beat earnings estimates in the third quarter of 2020, while only two gas utilities missed expectations in the second quarter. All of the companies improved earnings over the prior-year period in both quarters, except for Northwest Natural in the second quarter.

Those resilient earnings played a role in a nearly 11% fourth-quarter 2020 surge for a basket of stocks comprising the nine gas utility equities. Analysts said the earnings results alleviated concerns about the operating and financial performance of the utility sector during the pandemic.

Lately, analysts have been advising investors that utilities are trading at deep discounts to the market and warrant investor attention. However, analysts do not yet see a broad rebound for gas utilities.

"Utilities should be trading at higher relative premiums given strong renewable investment prospects and higher long-term EPS growth rates, as well as their illustrated ability to strongly mitigate COVID-19 economic impacts with stronger residential loads and regulatory support," analysts at Credit Suisse said in a Jan. 20 research note. "Our renewable energy investors frequently ask what's left to invest in given the strong pricing in that sector and we now point them toward utilities."

The investment bank sees integrated utilities in particular gaining favor amid federal stimulus spending, despite a mixed earnings picture for multi-utilities. Eight of 15 companies were seen topping year-ago EPS in the fourth quarter of 2020, with 11 growing revenues over the same period.

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Guggenheim Partners noted that utilities entered 2021 undervalued against investment-grade bond yields. The firm expects investor sentiment to improve but also anticipates divergent fortunes for sector stocks. That is because roughly 30 of the 42 utility stocks that Guggenheim covers have material events expected to reach resolution in 2021. Those include CenterPoint Energy Inc.'s pending sale of two gas utilities and broader restructuring.

"In our view, with a more finite amount of capital allocated to utilities this year, investors will likely be increasingly on the hunt for ideas within the sector — stock picking will continue to matter in 2021, as was the case in 2020," Guggenheim said in a Jan. 20 research note.

The new year has brought further evidence that Wall Street believes that fears about growing anti-gas sentiment are overblown. "[W]e see concerns of possible slower gas distribution investment as premature, especially with a viable hydrogen economy likely 20 years away ... and the focus of most gas utility capex on safety and main replacement," Credit Suisse analysts wrote.

Still, some sector observers have said gas utility executives need to explain their energy transition strategies to wary, ESG-minded investors. Management has lately answered those calls by ramping up commentary on alternative fuels such as renewable natural gas and hydrogen.