Despite its capital-intensive business model, utility companies are considered low-risk investment options during an economic downturn due to the indispensable nature of their services. Utilities provide customers with essential services such as heat, water, electricity, gas, etc.
With the Fed reiterating the need to have two smaller rate hikes by the end of the year, the economy is likely to enter a recession. Amid this backdrop, it could be wise to buy fundamentally strong utility stocks ONEOK, Inc. (OKE), Vistra Corp. (VST), and Brookfield Infrastructure Corporation (BIPC).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the utilities industry is well-positioned for growth.
Due to the fact that services such as electricity, water, and gas are vital for human survival, utility companies are regarded as reliable investment options. 2022 was a challenging year for most industries, but the utilities sector stood out thanks to its defensive nature.
Although the Federal Reserve announced a pause in rate hikes for the first time in 15 months, Fed Chair Jerome Powell reiterated to lawmakers that the central bank expects to raise interest rates one or two times more this year but at a slower pace to avoid pushing the economy towards a recession.
Amid the likelihood of a recession, the utility sector could be a good investment due to its defensive nature of business and the stability of cash flows. Additionally, the utility sector is witnessing a transition to renewable resources to generate power amid technological improvements and higher investments, helping them achieve economies of scale.
Investors’ interest in utility stocks is evident from the SPDR Select Sector Fund – Utilities’ (XLU) 2.6% returns over the past three months.
Considering these factors, it could be wise to buy the featured stocks. Let’s take a closer look at their fundamentals.
ONEOK, Inc. (OKE)
OKE engages in gathering, processing, fractionating, storing, transporting, and marketing natural gas and natural gas liquids (NGL). It operates through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. The company owns natural gas gathering pipelines and processing plants in the Mid-Continent and Rocky Mountain regions.
On May 14, 2023, OKE and Magellan Midstream Partners announced the execution of a definitive merger where OKE will acquire Magellan in a cash-and-stock deal worth $18.8 billion, including assumed debt. The merger will result in an enterprise value of $60 billion. This acquisition will enable EPS accretion and achieve tax and operational synergies.
In terms of the trailing-12-month return on common equity, OKE’s 36.25% is 54.4% higher than the 23.48% industry average. Likewise, its 9.73% trailing-12-month return on total assets is 10.4% higher than the 8.81% industry average. Furthermore, the stock’s 0.89x trailing-12-month asset turnover ratio is 37% higher than the 0.65x industry average.
OKE’s total revenues for the first quarter ended March 31, 2023, came in at $4.52 billion. Its net income increased 168.3% year-over-year to $1.05 billion, while its adjusted EBITDA rose 98.7% year-over-year to $1.72 billion. The company’s EPS came in at $2.34, representing an increase of 169% year-over-year. Additionally, its operating income increased 126.1% year-over-year to $1.50 billion.
Street expects OKE’s EPS for the quarter ending June 30, 2023, to increase 6.3% year-over-year to $0.98. Its revenue for the quarter ending December 31, 2023, is expected to increase 19.1% year-over-year to $5.99 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 8.1% to close the last trading session at $58.19.
OKE’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked first out of 64 stocks in the Utilities – Domestic industry. It has a B grade for Value and Momentum. Click here to see OKE’s ratings for Growth, Stability, Sentiment, and Quality.
Vistra Corp. (VST)
VST operates as an integrated retail electricity and power generation company. The company operates through six segments: Retail, Texas, East, West, Sunset, and Asset Closure. It retails electricity and natural gas to residential, commercial, and industrial customers. In addition, the company is involved in electricity generation, wholesale energy purchases and sales, commodity risk management, fuel production, and fuel logistics management activities.
On March 6, 2023, VST announced the agreement with Energy Harbor Corp., under which Energy Harbor would merge under a new subsidiary called “Vistra Vision.” The transaction would combine Energy Harbor’s nuclear, retail, and renewable businesses and Vistra Zero renewables and storage projects under the newly-formed subsidiary holding company.
This creates a leading retail electricity and zero-carbon generation company with the second-largest competitive nuclear fleet in the country. The transaction is expected to generate $125 million in annual synergies by 2025 from optimized operations and cost synergies.
In terms of the trailing-12-month asset turnover ratio, VST’s 0.47x is 95.7% higher than the 0.24x industry average.
VST’s operating revenues for the first quarter ended March 31, 2023, increased 41.6% year-over-year to $4.43 billion. Its net income attributable to VST came in at $699 million, compared to a net loss of $285 million in the prior-year quarter.
For the quarter ending June 30, 2023, VST’s revenue is expected to increase 70.9% year-over-year to $2.71 billion. Its EPS for fiscal 2023 is expected to increase 122.6% year-over-year to $3.50. Over the past year, the stock has gained 11.4% to close the last trading session at $25.30.
VST’s strong fundamentals are reflected in its POWR Ratings. It has a B grade for Growth and Value.
Within the same industry, it is ranked #3. To see VST’s rating for Momentum, Stability, Sentiment, and Quality, click here.
Brookfield Infrastructure Corporation (BIPC)
BIPC owns and operates regulated natural gas transmission systems. The company also engages in regulated gas and electricity distribution operations, transmission and distribution, and gas distribution.
On June 20, 2023, BIPC, Ontario Teachers’ Pension Plan, RedBird Capital Partners, and the Azrieli Group announced the agreement to acquire Compass Datacenters. The new ownership will support their development of sustainable, large-scale data centres for premier hyperscale customers, providing speed, flexibility, and control in the evolving tech landscape.
On April 12, 2023, Triton International Limited (TRTN) and Brookfield Infrastructure Partners (BIP) reached a definitive agreement for Triton’s acquisition. “Triton is an attractive business with highly contracted and stable cash flows, strong margins, and a track record of value creation,” said Sam Pollock, CEO of Brookfield Infrastructure.
“This transaction provides Brookfield Infrastructure with a high going-in cash yield, strong downside protection, and a platform for growth in the transportation and logistics sector. The transaction consideration also provides the opportunity for Triton shareholders to benefit from owning a globally diversified portfolio of infrastructure assets within a platform that has a proven history of generating long-term value for its shareholders,” he added.
In terms of the trailing-12-month EBITDA margin, BIPC’s 78.77% is 143.9% higher than the 32.30% industry average. Likewise, its 67.74% trailing-12-month EBIT margin is 263.2% higher than the 18.65% industry average. Furthermore, the stock’s 71.12% trailing-12-month gross profit margin is 86.8% higher than the 38.09% industry average.
For the fiscal first quarter ended March 31, 2023, BIPC’s total revenues rose 23.7% year-over-year to $4.22 billion. The company’s net income attributable to partnership came in at $23 million. Its consolidated funds from operations rose 7.5% year-over-year to $1.14 billion. In addition, its FFO per unit came in at $0.72, representing an increase of 12.5% year-over-year.
Analysts expect BIPC’s FFO per unit for the quarter ending June 30, 2023, to increase 13.4% year-over-year to $0.76. Its revenue for fiscal 2023 is expected to increase 7.3% year-over-year to $15.47 billion. The stock has gained 19.6% year-to-date to close the last trading session at $46.52.
BIPC’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B for Stability and Quality. It is ranked #2 in the Utilities - Domestic industry. To see BIPC’s ratings for Growth, Value, Momentum, and Sentiment, click here.
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OKE shares were trading at $57.63 per share on Friday afternoon, down $0.56 (-0.96%). Year-to-date, OKE has declined -9.74%, versus a 14.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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