IDU: Utilities Nearing 20x Earnings, Too Rich

seekingalpha09-13

The Utilities sector has outperformed in 2024, driven by AI and falling interest rates, with EPS growth from $12 in 2014 to $22 expected.The iShares U.S. Utilities ETF has surged 25% in the past year,...

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It's not Information Technology or Financials, but the small Utilities space. The group accounts for less than 4% of the SPX, and its momentum has been very strong in recent months, undoubtedly helped by the combination of increasing long-term electricity demand forecasts (care of AI) and the near-term bullish catalyst of falling interest rates. The group has steadily grown EPS from about $12 per share at the start of 2014 to an expected $22 per share when looking out the next 12 months, according to LSEG Datastream. The chart below from Yardeni Research reveals that Utilities are no bargain given the group's more than 20% YTD rally. Now, trading with a price-to-earnings ratio of more than 18x, there's clearly optimism baked in. I have a hold rating on the iShares U.S. Utilities ETF (NYSEARCA:IDU). Given the 25% return in the past 12 months, with the bulk of that coming in just the past five months, there's a hefty price to pay for this usually low-growth slice of the stock market. S&P 500 Utilities Sector P/E Now in the High Teens Yardeni According to the issuer, IDU offers investors exposure to U.S. companies that supply electricity, gas, and water, with targeted access to domestic Utilities-sector stocks. The fund seeks to track the investment results of an index composed of U.S. equities in the Utilities sector. IDU is a moderate-sized ETF with about $1.5 billion in assets under management as of September 11, 2024. The fund features a moderate 0.39% annual expense ratio (by contrast, the Utilities Select Sector SPDR Fund (XLU) sports a much lower 0.09% annual cost). The ETF's forward dividend yield is above that of the S&P 500, but a 2.2% payout rate is not all that high compared to owning a basket of individual high-yield electricity-industry stocks. Still, IDU's share-price momentum is perfect, according to Seeking Alpha's ETF Grading quantitative system. The ETF is at an all-time high as of this writing, and I will outline key price points on the chart to monitor later in the article. Risk metrics are not as sublime, however, primarily due to its concentrated portfolio. IDU's standard deviation is just 15.5%, which I don't consider elevated, and tracking error has also been an issue at times. But liquidity metrics are sound - the ETF's average daily volume is more than 180,000 shares while its 30-day median bid/ask spread is tight at just three basis points, per iShares. It's not surprising that IDU has performed well on both a relative and absolute basis over the past five months; value is back in vogue as is the high-yield factor. The 4-star, Bronze-rated ETF by Morningstar plots on the far left of the style box with an emphasis on large caps. There is ample mid-cap access too, but what concerns me is the fund's high 19.5x price-to-earnings ratio. Considering that long-term EPS growth is just 8.2%, the resulting PEG ratio is above two, which is rather lofty. IDU: Portfolio & Factor Profiles Morningstar IDU's portfolio doesn't feature many surprises. The largest weight is NextEra Energy (NEE), which I am neutral on, and it's important to recognize that NEE has high exposure to the volatile renewable energy segment, which has been under pressure throughout this year. Southern Company (SO) and Duke Energy (DUK) have significant portfolios in the Southeast US as well. Waste Management (WM) offers some diversification among the top holdings. IDU: Holdings & Dividend Information Seeking Alpha Seasonally, IDU has tended to struggle in September (of course, that's not the case this year). Bullish price action has ensued through the final quarter of the year when analyzing trends over the past 10 years. So, seasonality is soon to become a tailwind, although IDU has not followed the calendar trend in 2024. IDU: Bullish Seasonal Trends October-January Seeking Alpha The Technical Take With a high valuation, somewhat concentrated allocation, and bullish seasonals soon to be in play, IDU's technical situation is strong. Notice in the graph below that shares are near all-time highs while the RSI momentum oscillator at the top of the chart is firmly in a bullish range, never hitting technically oversold conditions going back to October of last year. Also take a look at the long-term 200-day moving average - it's positively sloped with the shorter-term 50dma above the 200dma, indicating that the bulls control the primary trend. Major upside price action began with a golden cross moving average pattern back in the first quarter of this year. Shortly after that, volume really started to come into the ETF. Of course, just about all of IDU's holders have unrealized gains, so we should see ample support due to a high amount of volume by price under today's share price. Overall, there is no resistance on the chart and the $92 to $94 range is support. IDU: Bullish Uptrend, Strong Momentum StockCharts.com The Bottom Line  I have a hold rating on IDU. Despite the very strong chart, the ETF's valuation is a concern considering the forward earnings growth outlook.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"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":"4.29.3","shortVersion":"4.29.3","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/2467077388"}