Scotia Capital analysts Andrew Weisel and Robert Hope see investor sentiment toward North America’s utility and power sectors as “indifferent or apathetic” as valuations continue to be hurt by “stubbornly high” interest rates as “robust economic data pushes out the expectations for rate cuts, driving 10-year bond yields higher.”
In a research report released Monday, the firm lowered its target prices for stocks in the group by an average of 6 per cent to reflect the valuation changes.
“The stocks look cheap on P/E but expensive on dividend yields,” they said. “We view both groups as undervalued but see more potential upside for Canadian utility stocks following their steady underperformance vs. U.S. peers since January. Fundamentally, we remain bullish on the group’s long-term earnings outlook given the numerous tailwinds driving strong rate base growth, including electrification, renewables, increasing data center load (link), and an expected pickup in manufacturing activity. Still, investors don’t seem to care. Our top U.S. picks remain CMS, WEC, and DTE, followed by SO, NEE, LNT, and AEP. In Canada, we recommend ALA-CA and EMA-CA.”
He maintained a $33 target and “sector outperform” recommendation for shares of AltaGas Ltd. The average is $33.81.
“We expect utilities to remain out of favor for the foreseeable future,” said the analysts. “Investor sentiment appears to be somewhere between apathy and negativity, in our view. Increasing bullishness around the macroeconomy, coupled with a more hawkish sentiment around interest rates, is keeping investors away from this sleepy, yield-sensitive sector. Consensus EPS forecasts for the S&P 500 now call for year-over-year growth of 12 per cent in 2024-2026. By contrast, consensus forecasts for utilities call for 7-8 per cent in all three years — quite strong by historical standards and attractively stable, but notably slower growth than the market overall. Additionally, many income and dividend funds are under pressure due to higher and rising interest rates, lessening the yield appeal of these equities. Moreover, given the severe recent volatility and sizable underperformance in 2023/YTD 2024, the stocks’ defensive appeal probably isn’t what it once was. Many generalists who don’t need to be in the sector are also spooked by wildfire risk and the potential for surprisingly negative regulatory outcomes. In our view, until we see a more meaningful market correction than we’ve seen so far in April, coupled with falling interest rates, investors will likely continue to ignore this sector.”