Resourceful Utilities Sector by Better Trades
Thanks a lot, Jane Fonda. Because of you, the U.S. looks up to France in nuclear
energy production as a percentage of its total power use.
Okay, maybe blaming Jane Fonda and her 1979 movie, 'The China Syndrome' for the lack
of a nuclear power footprint in the U.S. isn't spot-on accurate. But you get the
sentiment. The irony, if there is any to be had, is that the Three Mile Island
accident - occurring just 12 days after 'The China Syndrome' opened - highlighting
potential dangers of nuclear power actually showed how a reactor meltdown could be
contained with minimal damage.
When oil prices touched $147/bbl this summer, a tidal wave of green initiatives
were put back on the table, including the once sensitive topic of nuclear power.
U.S. Electricity demand is expected to increase 1.2% in 2009. President Obama has
made ending the U.S. dependence on foreign oil a primary goal of his administration,
with the caveat that companies must be given an incentive to reduce carbon
emissions. Is cap & trade legislation on its way? Will the nuclear initiative gain
steam?
The utility sector is a great way to play the potential nuclear renaissance.
Additionally, utilities are a safer bet because of their stability compared with
more cyclical stocks. Revenue streams are secure because most utilities have fixed
prices, most households have a high priority on their utility bill, and there is
limited competition amongst local utility providers.
Utilities with an established nuclear footprint include Exelon Corp (EXC), Southern
Company (SO), and Dominion Resources (D). These companies would clearly benefit
from a renewed nuclear push.
Shareholders, especially in the financial sector, are increasingly seeing their
dividends wiped out. Since revenues are stable and most utilities pay out a larger
percentage of profit as dividends, yields in the sector are strong.
With oil falling back to $40/bbl and more pressing systemic dangers dominating
headlines, the renewable energy push has been forced to the back burner. Even
without a drive towards alternative sources of energy, utility stocks are holding
their own during the recession.
On January 29th, Dominion blew out earnings despite a 28% drop in income, mostly
due to lower taxes and expenses, reporting $0.72/share for Q4 on revenue of $4.17
billion, compared with earnings of $0.52/share on revenues of $3.65 during Q4 in
2007. Wall Street had expected earnings of $0.68/share.
Exelon also easily topped Q4 expectations thanks to higher energy margins. Exelon
has gone hostile for NRG Energy (NRG) and will likely have to up their original $6
billion offer.
Options strategies are abundant in the utility sector. Bullish positions like
buying calls or writing puts on leading names like Exelon, Dominion, or Duke
Energy (DUK) are attractive. Long term plays on the alternative energy solution can
be accomplished through LEAPS, or Long Term Equity Anticipation Securities.
Whether or not the nuclear initiative is able to power up, the utility sector
provides a lot of options.
|
