Will The Utility Companies Rally by the End of 2012?

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Major utility companies such as Exelon Corporation (NYSE: EXC) and FirstEnergy (NYSE: FE) haven't perform well in recent months. Nonetheless, if the upcoming third quarter financial reports of these companies will be better than anticipated it could change the downward trend of these companies' stocks in the months to follow. Let's explore what is next for these companies and what might pull these companies' stocks up.

Up to now the major utilities companies haven't perform well during the year. As seen in the chart below, Exelon and FirstEnergy have underperformed the S&P500 index on a years scale. Granted, FirstEnergy's stock rose until August but then changed direction and tumbled down. Exelon’s stock didn’t perform well since the beginning of the year. Despite their modest performance compare to the market, they at least offer relatively high dividend yields.

<img src="/media/images/user_12845/first-energy-and-snp500_large.jpg" />

In terms of dividends the major utilities companies offer reasonably high dividend yields: in 2012   FirstEnergy offers a dividend yields of 4.9%, which is nearly $0.55 per share per quarter. In comparison, Exelon offers 5.8% yield, which is nearly $0.52 per share per quarter; American Electric Power  (NYSE: AEP) offers 4.22% yield, which is nearly $0.47 per share per quarter. 

These companies operating profitability isn't stable and varies from one quarter to the other:  As seen in the chart below, the operating profitability of FirstEnergy is lower in the second quarter of 2012 compared to the first quarter of 2012, but slightly higher than the parallel quarter of 2011. Exelon has done better in the second quarter of 2012 compared to the first; however, Exelon’s operating profitability declined compared to the parallel quarter of 2011. The decline in its profitability may have been among the factors to pull down the company's stock during the year. American Electric Power's operating profitability, as oppose to the other above-mentioned companies, hasn’t changed much during recent quarters.  It's worth mentioning that these utilities companies have different sources of energy and the mixture of input differs from one company to the other, e.g. for FirstEnergy nearly 64% of its energy input is from coal and only 18% nuclear.  On the other hand, 92% of Exelon electricity is produced with nuclear power. This results in different costs and thus different operating profits.  

<img src="/media/images/user_12845/first-energy-and-other-profitability_large.jpg" />

It's also worth considering that the merger, which was closed at the end of February, of FirstEnergy with Allegheny Energy is expected to be completed within a year, i.e. around the end of the first quarter of 2013, according to the company’s press release. This means, analysis of FirstEnergy's progress should be taken with a grain of salt because the company is in the process of a major transition that could result in a different merged company.   

 Hotter Summer=Higher Revenues?

Despite the modest profitability of the major utility companies there could be some cause for optimism in the third quarter financial report. The hotter than normal summer has most likely pulled up the demand for electricity throughout the U.S. This could result in the rise in revenues in the upcoming quarterly reports for the major utilities companies. On the other hand, the milder than normal winter may have been among the factors for the drop in energy consumption during the first half of 2012: According to the EIA report, during the first six months of 2012 the U.S energy consumption reached 47,148 Trillion Btu. As a comparison, during the first six months of 2011 it was 48,918 Trillion Btu, a drop of 3.6%.  If the upcoming EIA report will show a sharp growth in energy consumption compared to the parallel months of previous years, this could suggest there should be a rise in revenues for FirstEnergy and Exelon.

Therefore, despite the modest performance of the major utilities companies in recent months, perhaps the upcoming financial report will show a growth in revenues that could result in a rally for these companies’ stocks. 

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