XLU: The Near-Term Outlook For The Utility Sector Is Not Promising (Rating Downgrade)

seekingalpha04-16

Utilities Select Sector SPDR Fund ETF became the main laggard in the U.S. stock market for the last 12 months.The upcoming quarterly results are unlikely to reveal some encouraging EPS dynamics, in my...

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(Rating Downgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-16 14:43 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683934-xlu-near-term-outlook-for-utility-sector-not-promising-rating-downgrade><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Utilities Select Sector SPDR Fund ETF became the main laggard in the U.S. stock market for the last 12 months.The upcoming quarterly results are unlikely to reveal some encouraging EPS dynamics, in my...</p>\n\n<a href=\"https://seekingalpha.com/article/4683934-xlu-near-term-outlook-for-utility-sector-not-promising-rating-downgrade\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4566","symbol_name":"资本集团","start_time":0,"source_url":"https://seekingalpha.com/article/4683934-xlu-near-term-outlook-for-utility-sector-not-promising-rating-downgrade","article_id":"2427818523","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1312366593/image_1312366593.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2427818523","pubTimestamp":1713249809,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Utilities Select Sector SPDR Fund ETF became the main laggard in the U.S. stock market for the last 12 months.The upcoming quarterly results are unlikely to reveal some encouraging EPS dynamics, in 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SGD-H1","IE00B19Z3B42.SGD":"Legg Mason ClearBridge - Value A Acc SGD","LU1162221912.USD":"FRANKLIN INCOME \"A\" (USD) ACC","IE00BD4GTT62.SGD":"Legg Mason ClearBridge Infrastructure Value A SGD-H (mdis) plus","BK4533":"AQR资本管理(全球第二大对冲基金)"},"translate_title":"XLU：公用事业部门的近期前景不乐观（评级下调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLU":1,"SO":1,"NEE":1,"AEP":1,"CEG":1,"DUK":1},"content_text":"Utilities Select Sector SPDR Fund ETF became the main laggard in the U.S. stock market for the last 12 months.The upcoming quarterly results are unlikely to reveal some encouraging EPS dynamics, in my view.With calculated 8.5% upside potential and a weak near-term outlook, this article downgrades my previous Buy rating on XLU.Justin Paget Since my last coverage on Utilities Select Sector SPDR Fund ETF (NYSEARCA:XLU), the fund has remained marginally flat in terms of performance. However, the near-term outlook doesn't look promising, and with this piece, I'm downgrading the XLU to a Hold rating, in line with a lower upside potential. Last time, I suggested that the utilities sector could catch the S&P 500 performance thanks to a slowdown in the inflation rate and the end of the high-interest rate environment. But the sector remains far from investors' preferences due to the striking performance of the technology players. Utilities, in turn, delivered a negative earnings growth surprise in the last quarter, which could be the case for Q1 2024 as well. Investment discussion XLU provides exposure to the Utilities Select Sector Index, which includes mainly leading U.S. utilities engaged in the distribution of electric power, gas, water, and steam. Fund industry allocation (SSGA) Since my last coverage, the fund's industry allocation has remained almost unchanged, with the main focus on electric utilities, which increased slightly to 67.4%, followed by mixed utilities with a 27.2% share. The ETF remained highly concentrated amid its top 5 positions, which account for 40% of the portfolio and are distributed as follows: NextEra Energy (NEE) with a 13.7% share; Southern Company (SO) with 7.9%; Duke Energy (DUK) with 7.7%; Constellation Energy (CEG) with 6.4%; and American Electric Power (AEP) with 4.5%. Top 10 holdings (SSGA) As of April 12, 2024, the fund manages assets in the amount of $11.69 billion, which come to investors at a reasonable cost of 0.10% on annum. The AUM value, however, decreased since my previous piece by approximately $3 billion, due to the net outflows from investors. The main reason for this could be explained by the frustrating performance of the utilities sector for the last 12 months, which lost 8.56%, being the main laggard. Sector performance (finviz) As I wrote previously, utilities continue to be outshined by the technology sector, which surged considerably thanks to the strong performance of the main chip players. The total return dynamics of XLU for the last 12 months recorded 8.6% setback, which is better compared to the overall sector but way behind the broad market index S&P 500 as well, which grew 25.7%. Data by YCharts Another point is the weak earnings results of utilities. In the final quarter of last year, the sector delivered a significant EPS decline as well as a 3.9% negative earnings surprise (according to LSEG). Going forward, the past winter was the warmest on record, which does not provide for an encouraging earnings result in the first quarter of 2024. Meanwhile, looking at the valuation of the top 5 positions of the fund, we can notice that apart from CEG, they are currently trading with prominent discounts compared to the 5Y mean forward P/E. Valuation of the fund's top 5 positions (Seeking Alpha) Going forward, the electricity consumption profile could benefit the electric utilities from Q2 onwards due to the early start of the summer, which is expected to bring the hottest temperatures. In addition, the transition to green energy is gaining momentum, as the U.S. has set a goal of achieving carbon emissions reductions of at least 50% below 2005 levels by the end of the current decade. Add to this, record sales of electric vehicles in 2023 and the consistent expansion of data centers, which will provide for sustainable growth in electricity demand in the coming year. Conclusion I will use the same model for the calculations of the XLU upside potential. Based on the weighted average target prices of the fund's securities, divided from Seeking Alpha screener, the upside potential of the XLU should be 8.5%, which is almost half that was in my previous estimates and no longer implies a Buy rating. Valuation model based on consensus estimates (Seeking Alpha) NEE stands to contribute the largest upside potential among the fund positions, or 1.6%. This is not surprising, as the company trades at a 30% discount at the forward P/E ratio compared to the 5Y average and has a consistent earnings surprise track record. Active expansion of renewable energy capacity, Inflation Reduction Act benefits, economic growth in Florida, as well as the development of hydrogen energy technologies, are the main drivers of NEE growth, which makes the stock a preferred choice at this point. To sum up, the utilities sector remains far from the spotlight of investors in the U.S. stock market, as attention is focused on rapidly rising tech stocks. The high interest rate environment is keeping pressure on utilities as a result of their significant indebtedness. The sector delivered a negative earnings surprise and could do so in the current earnings period, which is also the reason I am downgrading the XLU from a Buy to Hold rating. However, there is a reason to believe that the beginning of the Fed's rate-cut cycle could have a positive impact on the financial performance of utility companies. Lower borrowing costs will ease the debt burden, while conservative investors could return to the dividend stories of U.S. utilities after a reduction in government bond yields. Risk factors  Persistent concern about inflation is forcing the Fed to take its time cutting the interest rate, which is not beneficial for utilities with high debt levels. This could also put pressure on capital expenditure programs. In addition, the rumors say that a potential change in the White House could have negative consequences for the decarbonization of the U.S. economy and green energy ambitions.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427818523"}