We expect the electric utility Pepco Holdings, Inc. (POM) to beat expectations when it reports third-quarter 2014 results on Nov 5. The company’s earnings surprise history looks unblemished over the trailing four quarters, with an average beat of nearly 15.7%.
Why a Likely Positive Surprise?
Our proven model indicates that Pepco Holdings will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. That is the case here as you will see below.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +4.76%. This is because the Most Accurate Estimate is at 44 cents per share while the Zacks Consensus Estimate is at 42 cents per share.
Zacks Rank: The combination of Pepco Holdings’ Zacks Rank #2 and +4.76% ESP makes us confident of an earnings beat this quarter.
The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-than-Expected Earnings?
Similar to the second quarter, Pepco Holdings is expected to benefit from an improvement in electricity distribution and network transmission revenues, a reflection of the consistent investments made by the company to strengthen its infrastructure.
During the third quarter, Maryland Public Service Commission approved an annual rate hike effective immediately. In addition, the recovery of smart meter costs in electric distribution base rates has begun in the District of Columbia and Delaware. The favorable regulatory decision is expected to benefit the company’s earnings in spite of the cooler summer temperatures this year.
In the to-be-reported quarter, the shareholders of Pepco Holdings gave their approval on the Exelon Corporation (EXC) merger deal. This deal is expected to be completed in the second half of 2015 and benefit both Exelon and Pepco customers.
Other Stocks to Consider
Pepco Holdings is not the only firm looking up this earnings season. We also see likely earnings beats coming from the following utilities:
NRG Yield, Inc. (NYLD) has an earnings ESP of +75.44% and a Zacks Rank #1 (Strong Buy).
Consolidated Edison, Inc. (ED) has an earnings ESP of +2.80% and a Zacks Rank #2 (Buy).
Dynegy Inc. (DYN) has an earnings ESP of +260.00% and a Zacks Rank #2 (Buy).
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