On Jun 20, Zacks Investment Research downgraded electric utility firm, Southern Company (SO), to a Zacks Rank #4 (Sell).
Why the Downgrade?
Southern Company witnessed sharp downward estimate revisions after reporting weak first-quarter 2013 results. On Apr 24, 2013, Southern Company reported first-quarter 2013 earnings per share (excluding certain one-time charges) of 49 cents, below the Zacks Consensus Estimate of 51 cents. The weaker-than-expected results could be attributed to spiraling expenses.
Moreover, Southern Company’s total operating expense for the first quarter of 2013 stood at $3,572.0 million, approximately 25.9% higher than the prior-year level.
Additionally, Southern Company’s heavy reliance on coal-generated energy supply and a lack of meaningful contribution from renewable energy is a matter of concern. In the current age of growing emphasis on ‘environment friendly or green’ energy, the company may be forced to divert cash flow to ensure regulatory compliance, which can adversely impact profitability.
We also remain skeptical regarding Southern Company’s $14 billion investment for the construction of two new reactors at the company’s existing nuclear site in Vogtle, Georgia. With a fair chance of cost overruns and likely modifications – to fully address the safety risks exposed by the meltdown at Japan's Fukushima plant last year following a devastating earthquake and tsunami – the project cost could easily end up around $20 billion. This will substantially increase Southern Company’s leverage and deteriorate its credit metrics.
A combination of all these factors weighed on the earnings estimates for Southern Company in the last 60 days. The Zacks Consensus Estimate for the second quarter of 2013 has gone down to 69 cents per share from 70 cents per share, while it dropped to $2.75 per share from $2.76 per share for 2013.
Stocks to Consider
Not all electric utility firms are performing as poorly as Southern Company. The stocks of Companhia Paranaense de Energia (ELP), CPFL Energia SA (CPL) and ALLETE Inc. (ALE) are worth considering. Companhia and CPFL Energia sport a Zacks Rank #1 (Strong Buy), whereas ALLETE carries a Zacks Rank #2 (Buy).
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