Hot Picks in utilities: Eversource Energy, Duke Energy & Sempra

Key Concepts

• Electric Utilities as Investment: Shift from "sleepy" to "red hot" due to AI data center demand.
• Eversource Energy: New England-based utility, currently trading at a discount due to regulatory troubles in Connecticut.
• Duke Energy: Large US utility, strong focus on infrastructure build-out for data centers and AI, with significant capital expenditure plans.
• Sempra Energy: California and Texas-based utility, benefiting from divestitures of non-regulated businesses and strong growth in Texas.
• Rate Base Growth: The value of a utility's assets used to provide services, which influences its ability to earn a return.
• Earnings Per Share (EPS) Growth: The increase in a company's profit allocated to each outstanding share of common stock.
• Dividend Yield: The annual dividend payment per share divided by the stock's current market price.
• Valuation Discount: When a stock trades at a lower price relative to its peers or its historical multiples.
• Regulatory Environment: The rules and oversight governing utility operations, which can impact profitability and investment.
• Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets.
• Data Centers: Facilities that house computer systems and associated components, driving increased electricity demand.
• Artificial Intelligence (AI): A field of computer science focused on creating intelligent machines, a major driver of data center growth.

Eversource Energy: Discounted Valuation Amidst Regulatory Headwinds

Eversource Energy, a provider of electricity and gas services primarily in Massachusetts, New Hampshire, and Connecticut, is currently trading at a significant discount to its peers. This valuation is attributed to recent regulatory troubles in Connecticut, specifically the denial by the Connecticut Utility Board of Eversource's ability to divest its water utility in the state. While the water utility represents a minor portion of revenues (2% in 2024), the market's reaction is seen as a concern about a tightening regulatory environment in Connecticut, rather than a direct financial impact from the divestiture denial.

Key Points:

• Geographic Focus: Primarily serves Massachusetts, New Hampshire, and Connecticut.
• Valuation Discount: Trading at a 25-30% discount to peer median, down from over 20% previously. Historically traded at 16-17 times forward earnings, now south of 12-13 times.
• Growth Potential: Despite regulatory issues, the company is expected to achieve competitive earnings per share (EPS) growth and capital expenditure opportunities.
• Rate Base Growth: Projected at around 8% annually over the long term, which is competitive with the peer group.
• Dividend Yield: Currently 4.3%, potentially higher due to the recent stock price decline.
• Recent News: Stock trading down significantly due to Connecticut Utility Board denying water utility divestiture. This is interpreted as a signal of regulatory tightening.
• Analyst Perspective: CFRA maintains a bullish stance due to the discount, believing the market may be overreacting to regulatory concerns rather than fundamental financial difficulties. They anticipate considerable upside potential for long-term investors, assuming no significant guidance changes from the company.

Duke Energy: Powering the AI Revolution with Infrastructure Investment

Duke Energy, one of the largest electric utilities in the United States, is positioned to benefit significantly from the burgeoning demand for power driven by AI data centers. The company's core operations are in the Southeast (North and South Carolina, Florida) and the Midwest (Ohio, Indiana).

Key Points:

• Strategic Focus: Leading the infrastructure build-out for data centers and artificial intelligence.
• Capital Expenditure Plan: Recently increased from $87 billion to an anticipated $95 billion for the period 2026-2030. This investment covers electric transmission, distribution, natural gas distribution, and new electric generation capacity (including renewables).
• Electricity Sales Growth:
  • Projected 1.5% to 2% growth next year.
  • Acceleration to 3% to 4% growth from 2027 through 2029, exceeding historical norms.
• Customer Growth: Healthy customer growth in their territories, particularly in the Carolinas and Florida, supports regulatory approval for capital spending.
• Earnings Growth: Currently growing EPS at 6-7% annually. Expected acceleration towards the end of the decade (around 2028-2029) to 7-8%, potentially leading to a higher valuation multiple.
• Dividend Yield: Currently 3.6%.
• Data Center Trend: North Carolina is a key area for data center growth, with Amazon Web Services announcing a $10 billion investment that will support Duke Energy.

Sempra Energy: Streamlined Operations and Growth in Attractive Markets

Sempra Energy, primarily based in California and Texas, is expected to see its earnings accelerate following the divestiture of non-regulated businesses. The company operates in two highly attractive markets, with Texas being particularly notable for its rapid electricity demand and data center growth.

Key Points:

• Geographic Focus: California and Texas.
• Business Streamlining: Divested non-regulated businesses, including operations in Mexico and liquefied natural gas (LNG) terminals in Central America.
• Earnings Outlook: Earnings are expected to bottom out in the current year and accelerate thereafter.
• EPS Growth Target: An attractive 7-9% growth target for EPS, with potential to reach the higher end of this range.
• Regulated Operations Mix: Following divestitures, the earnings mix from regulated operations is projected to be close to 100%, up from approximately 80% currently. This is seen as a less risky profile, which should benefit valuation.
• Market Attractiveness: Texas is highlighted as one of the fastest-growing markets for electricity demand and data center growth.

Conclusion

The electric utility sector is experiencing a significant shift, driven by the escalating demand for power from AI data centers. Eversource Energy, despite facing short-term regulatory challenges in Connecticut, presents a compelling investment opportunity due to its discounted valuation and strong underlying growth potential in its core New England markets. Duke Energy is a key player in facilitating this AI-driven power demand through substantial infrastructure investments and projected acceleration in electricity sales and earnings. Sempra Energy, by streamlining its operations and focusing on high-growth markets like Texas, is also well-positioned for future earnings acceleration and a potentially higher valuation. Investors are advised to consider these utilities as strategic plays on the evolving energy landscape, with a particular focus on their capital expenditure plans, regulatory environments, and growth drivers.