Don Diaz, Contributing Editor
Wall Street remains cautious regarding the energy sector as a whole, with most investment and research firms holding a “neutral” rating on the industry group. However, there are some individual issues that warrant merit, qualifying as a “hot pick” on our list. Public utilities, which are viewed as a separate group by most market participants, are currently “in favor” with respect to the entire sector. Accordingly, here are some of the best names within the two sectors.
“- Southern Union Co. (NYSE:SUG), from the public utility sector, is expected to outperform the market over the next six months. Southern recently lowered its earnings guidance for all of 2004 to a range of $1.28-$1.42 per share, off from its previous guidance of $1.35-$1.50 per share. Taken at face value, this appears to be negative news for Southern Union’s profit outlook in ’04. Not in this case, as the company revised its guidance in the wake of a five percent dividend paid in July. Additionally, a federal judge ruled in August to uphold the firm’s $60 million verdict against Arizona Corporate Commissioner James C. Irvin. Irvin was found to have interfered with Southern Union’s prospective purchase of Southwest Gas Corporation in 1999.
“- DPL Inc. (NYSE:DPL) expects to beat Wall Street estimates for its fiscal year 2004. DPL recently raised its earnings guidance to a range of $1.15-$1.25 per share, citing its rebounding financial asset (trading) portfolio. This pubic utility company will likely outperform the market over the next six months, as trading profits and operational revenue are expected to propel DPL higher in ’04. The company’s stock also maintains a very low price-to-earnings multiple when compared to other sector members.
“- Edison International (NYSE:EIX) is another public utility sector company that qualifies as a hot pick. Edison’s recent lowering of its earnings guidance for 2004 has done little to dim the prospects for this three-pronged holding company (EIX holds and operates three separate business segments). Edison is expected to significantly outperform the market over the next six months, and represents very little market risk to investors.
“- Exelon Corp. (NYSE:EXC) remains a favorite large-cap public utility holding of institutional investors. Many utility funds count Exelon among their largest positions. The company has reemphasized its commitment to its core, regulated business operations, staying for the most part, out of the transmission sector. It has trimmed overhead costs on a year-over-year basis by $600 million, and trades at a low multiple to forward earnings of 10.7 vs. the industry average of 12.7, making Exelon an excellent choice for our hot picks list.
“- Halliburton Co. (NYSE:HAL) is a pure energy sector hot pick that will likely outperform the market over the next six months. The company’s two main revenue streams, energy services and engineering and construction, both appear poised to reap full benefit from a federal court ruling dismissing state law and statutory fraud allegations against the company. As a result, Halliburton’s earnings growth is expected to accelerate over its next fiscal year, besting the profit growth rate of its previous three fiscal years. Additionally, its most recent quarterly earnings statement blew away street expectations.
“- Spinnaker Exploration (NYSE:SKE), although a small-cap entry on our hot-picks list, Spinnaker is big hit among institutions, which own nearly 83 percent of the firm’s 33.2 million outstanding shares. Among these, financial institutions appear to be accumulating greater amounts of Spinnaker’s shares. This is a fiscal boon for a smaller company such as SKE, and bodes well for their future performance.
“- Plains Exploration & Production Co. (NYSE:PXP) is an independent oil and gas company deriving its main revenue flows from its upstream businesses. The company maintains a low price-to-earnings multiple when compared to other sector members, and its relative price fluctuation measured against its price consistency remains stable. This should allow Plains Exploration to outperform the equity markets over the next six months.
“- Entergy Corp. (NYSE:ETR) returns our list to a public utility sector hot pick that is expected to significantly outperform the market through 2004. The firm continues to build on its reputation for structural soundness, while recently posting better-than-expected operational earnings of $1.17 per share. Entergy also recently raised its fiscal year 2004 earnings guidance on the basis of its operational success and trading profits from its Entergy-Koch Trading unit.
Some other noteworthy names that would certainly be solid entries on any energy/utility hot picks list include Constellation Energy (NYSE:CEG), and Pinnacle West Capital (NYSE:PNW).
Diaz is an independent industry analyst with 15 years experience in the financial and energy markets. He may be contacted at email@example.com.