A little love for the electric utilities
(published Thursday 22nd in Cotizalia)
What a bad two years of stock market behavior. The “utilities” sector (SX6E Index) is one of the worst performers in 2009 and also did not do well in 2008. Since the process of mergers and acquisitions was completed, the industry suffers the hangover of debt, falling demand, electricity prices stalling and, lest we forget, these European regulators that do so much damage to the investment process.From the UK to Belgium and Finland we read news of interventionism and regulatory decisions that make impossible the proper management of a business that has become more cyclical and capital intensive over the years. Here in the UK, the government has repeatedly threatened with windfall profit taxes. Perception of public service, it is called. But when the sectors of water or gas are drowned out by generating returns below their cost of capital, the only one who comes to the rescue is the market. As proof, three figures: €12bn euros in capital increases, €65bn in debt refinancing and €22bn in forced divestments due to the high debt in European utilities between 2008 and 2009.
In Spain it’s similar. It is almost impossible to manage long-term investments with fluctuations in something as essential as is the policy on nuclear power, delays in the collection of the tariff deficit, endless delays in regasification regulation and without a coherent policy and planning capacity. When the government is striving to manage the country’s reserve margin without the sector ends up having to give subsidies to coal generation.
But let’s look at the positives. For there are a lot. The sector is clearly oversold on technicals. Additionally, two recent reports from Merrill Lynch and Citigroup indicated that it is the most underweight sector in the portfolios of investors. It trades at a PE compared to the market of 0.8, the lowest level since October 2000 and gives an average dividend yield 5.5%. Moreover, debt is being corrected quickly with good divestitures.
In an industry that has seen a drop in earnings per share of only 10% on average during a period of recession, current multiples are not demanding. At a PE of 12x average, the lowest since 2005, investing in this sector is a low risk bet if investors anticipate the return of inflation and improving demand.
The market has done well to play the cyclical sectors anticipating a recovery, but, for example, the percentage of exploration and production (E&P) stocks that are trading at higher prices than those when oil was at $ 140/barrel is almost 100%. I still see value in the cyclical, but I get the feeling that it’s time to give a little love to the “utilities”.