Shares of Southern Co.
How it got here
One wonderful aspect about the stock market is that there will always be sectors bucking the trend and heading higher as the overall market ticks lower. One group that has fared moderately well despite global concerns of a slowdown has been electric utilities.
Southern, the second-largest generator of electricity in the United States behind only Exelon
However, even companies with necessity products face headwinds that could derail their profitability -- or at least hinder it. Southern and SCANA
How it stacks up
Let's see how Southern stacks up next to its peers.
Exelon's heavy reliance on nuclear and Entergy's
Source: Morningstar, Yahoo! Finance.
We can also see the risks described above exhibited in these metrics. Entergy is the "cheapest" of the group, but it has also dealt with regulatory writedowns, non-fuel charges, and weather-related weakness in its latest quarter.
Similarly, Exelon has to deal with the prospect of being the largest provider of nuclear energy in the U.S. despite the fact that nuclear power is considerably more expensive than alternative forms of fuel at the moment. That is necessitating Exelon look at alternate forms of fuel or go natural gas heavy now rather than later.
NextEra Energy has done well because it's invested a considerable amount of its capital in green initiatives. It attributed an offset in lower energy prices (which all utilities are dealing with) to a rapid increase in wind generation. Those investments, however, have bumped its debt levels to worrisome levels relative to cash on hand.
Southern is actually the priciest of the group based on metrics despite suffering the same weather-related problems plaguing Exelon and Entergy and having considerably higher debt-to-equity ratio than Exelon.
Now for the $64,000 question: What's next for Southern? That question is going to depend on whether energy prices rebound, if Southern can reduce its costs by investing further in green initiatives, and if it can find a way to make its nuclear energy generation competitive.
Our very own CAPS community gives the company a highly coveted five-star rating, with 94.8% of members expecting it to outperform. Although I've yet to make a CAPScall on Southern, I'm ready now to enter a call of underperform.
You might be thinking, "Entering an underperform rating on an electric utility is suicide!" And you're probably right in almost every case. What I can't wrap my hands around is why Southern's stock is doing so well with electrical prices notably down and weather patterns clearly not in its favor. I also don't like the company's choice to build more nuclear facilities, which are currently not price competitive, or the fact that it's much heavier in debt relative to equity than larger peer Exelon. Southern's premium simply isn't warranted relative to this group, and I don't expect it to keep up this run much longer.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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