Three Electrifying Stocks
The power grid has endured three decades of abuse. It took the biggest blackout in U.S. history, one that caused 50 million people to lose power on August 14, 2003, to mobilize the government and electrical utilities to begin dealing with the problem. Since then, Congress has passed legislation that provides incentives for utilities to invest more in power distribution and transmission.
It will take years and vast sums of money to renovate the grid. Nearly half of the system's 2.2 million miles was built between 1948 and 1970. That equipment has a half life of roughly 40 years. That means that much of the system has already begun to degrade.
And it means big bucks for the companies that will help repair the grid.
North American utilities spent about $9 billion in 2007 to upgrade the aging electric grid, says Sterne Agee analyst Michael Coleman. That represents a 20% increase from 2006 and is twice the level of spending in 2003. Coleman expects grid investment to grow to $10 billion by 2010.
U.S. laws passed in 2005 and 2007 are crucial to businesses that supply the equipment and know-how to build and maintain the power grid. The laws allowed more private capital to invest in power infrastructure, mandated new standards of reliability that force utilities to upgrade, and made it easier for state and local governments to acquire land for creating new electrical-transmission routes.
Moreover, power companies have the wherewithal to finance grid improvements. "Utilities right now have the lowest debt-to-capital ratio they have had in the past 30 years," says Russell Croft, co-manager of the Croft Value fund. "They are undercapitalized and can take on debt for new projects."
Croft has identified three stocks of companies that should benefit the most from upgraded spending on the power grid. They are General Cable, ABB and Quanta Services.
General Cable will supply many of the power lines. The Highland Heights, Ky., company makes aluminum, copper and fiber-optic wire and cable.
Sales to utilities represented one-third of the company's 2007 revenue of $4.6 billion. "As the North American market leader, General Cable is extremely well-positioned to grow volumes and achieve price increases in excess of cost in this market," Coleman says.
He says the company will be able to boost prices enough to offset the increasing cost of materials from rising metal prices. Roughly half of General Cable's sales come from contracts that contain provisions to raise prices as material costs rise.
The U.S. grid build-out is only one facet of General Cable's growth prospects, Coleman says. He expects demand from emerging markets, which are rapidly expanding their power grids and increasing exploration for oil and gas worldwide to fuel sales growth.
For example, General Cable recently received a $30 million award for its first offshore wind-farm project. Its products also are used in the construction of nuclear power plants, hydroelectric power generation and exploration for oil in the tar sands of Albert, Canada.
The stock (symbol BGC) gained 25% over the past year through April 25. The shares, which closed at $71.70 on April 25, trade at 15 times the $4.93 per share that analysts expect the company to earn this year. Coleman rates the stock a "buy" and says it's worth $77. General Cable will report first-quarter results April 30.
One way for utilities to save money is to build a more efficient power grid. That's where ABB enters the picture. The Swiss company expects to produce annual earnings gains of 25% over the next few years, largely because of strong sales of power-transmission equipment that reduces energy losses between power plant and end-user.
It also makes industrial-automation equipment, such as high-efficiency motors and robotics. The power-transmission business accounted for half of ABB's $29.2 billion in sales over the past 12 months.
ABB delivered impressive first-quarter results. The company reported April 24 net income of $1 billion for the period, an increase of 87% from the same quarter in 2007. Michel Demaré, ABB's top executive, credited utilities' continued investment in power infrastructure as the key reason for the results.
The shares have surged 56% over the past year. But given the company's growth prospects, the stock appears reasonably priced. At $30.07, ABB's American depositary receipts (ABB) trade at 19 estimated 2008 earnings of $1.57 per share. The stock is a member of the Kiplinger Green 25.
Once the cables and equipment are purchased, utilities need to hire contractors to put all the pieces together. Houston-based Quanta Services is the leader in this market.
The company won four of the five largest contracts for grid work in 2007. The multi-year contracts guarantee a recurring stream of revenues for their duration. Croft says Quanta will generate annual earnings growth of 20% or more over the next three years to five years.
The stock (PWR) is hardly a bargain. The shares, which jumped 5% on April 25, to $27.13, trade at 32 times forecasted 2008 earnings of 84 cents per share. The shares have fallen 4% in the past year.
Quanta's results can be volatile quarter to quarter because a portion of the business is dependent on revenues from restoring power lines damaged from storms and natural disasters. So it's wise to watch this stock closely and buy on pullbacks.