Guggenheim says buy these utility stocks for 2024 outperformance

Guggenheim is going into 2024 with a different stance on utility stocks. The firm believes the sector looks materially undervalued and after steep 2023 underperformance, utility valuations look poised to snap back sharply this year. The firm, whose new Best Idea in the space is NextEra Energy (NEE), upgraded Edison International (EIX), Eversource Energy (ES) and Pinnacle West (PNW) to Buy and Allete (ALE), Avista (AVA), and NorthWestern (NWE) to Neutral. While the company notes it now has no Sell ratings in the group, it downgraded American Electric Power (AEP), DTE Energy (DTE), Evergy (EVRG), Idacorp (IDA), Public Service Enterprise (PEG) and Nuscale Power (SMR) to Neutral in conjunction with its 2024 outlook note this morning.

KEY FACTORS FOR UTILITIES PERFORMANCE IN 2024: Coming off valuation relative lows, Guggenheim sees utilities at a fundamental discount versus its regression/PEG valuation models. Among the key factors for utilities performance this year, the firm also sees interest rates certainty and/or softening, financing and balance sheet concerns of 2023 subsiding after a broadly stronger than expected set of EEI disclosures, strong utility fundamentals, and concerns around renewables deployment starting to ease. Guggenheim says that NextEra strength could be a bellwether for other regulated renewables builders, or in other words, NextEra’s success could drive the entire group higher for 2024.

Overall, the firm is shifting its sector view on 2024. The sector is oversold, company-specific nuances create opportunities, and given its constructive stance on the group in general, Guggenheim no longer has any Sell ratings. With that said, the firm also now only recommends two utilities trading at relative price-to-earnings premiums, given its more “value” bend within the sector as it reverts to interest rate normalization, with the strongest load growth seen in decades and investors’ renewed focus on the sector’s capital growth opportunities, as well as many balance sheet concerns easing — the entire sector is due for a noticeable snap back with select names within the group outpacing the index, which is a key driver of our calls and ratings changes.

RATINGS ACTION: NextEra is the firm’s new 2024 Best Idea and top utility pick. Guggenheim says that if an investor must own one utility in 2024, NextEra should be the pick as it checks all the boxes for drivers, including oversold position on any of our absolute/relative metrics, valuation disconnect with several industry and macro level tailwinds; several near-term company-specific catalysts including March developer day; and scarcity value for its asset base. Basically, the stock is oversold in the firm’s view, with arguably the most to gain from improving fundamentals/macro backdrop. Guggenheim believes NextEra could further lift the entire sector as datapoints continue to improve beginning with the Q4 earnings call.

Meanwhile, the firm removed FirstEnergy (FE) from its Best Idea list but retained Buy rating as material valuation upside remains. Additionally, Guggenheim upgraded Edison International and Pinnacle West to Buy from Neutral, and Allete, Avista, and NorthWestern to Neutral from Sell, while downgrading American Electric Power, DTE Energy, Evergy, Idacorp, Public Service Enterprise and Nuscale Power to Neutral.

The firm’s downgrade of Evergy is purely around the uncertain regulatory backdrop in KS which, in its view, has materially deteriorated at no fault of the company. DTE and Public Service Enterprise downgrades are purely on valuation/performance, Guggenheim says, adding that for American Electric Power it was due to regulatory and growth/balance sheet execution. The firm does seek a better entry point for each of these four names as the regulatory noise subsides and/or rate cases bear fruit.

Neutral-rated names where Guggenheim could reconsider its risk/reward balance with pending regulatory proceedings include Ameren Corp. (AEE), American Electric Power, Allete, Avista, CMS Energy (CMS), DTE, Evergy, Exelon (EXC), Alliant Energy (LNT), New Jersey Resources (NJR), Northwest Natural (NWN), OGE Energy (OGE), Public Service Enterprise, and WEC Energy (WEC). Buy-rated names that remain impacted by the firm’s “watchlist” states include Dominion Energy (D), Duke Energy (DUK), Entergy (ETR), FirstEnergy, NextEra, and PPL Corp. (PPL).

Guggenheim also recognizes several companies with rate case activity where it does not see major concerns given the state of current litigation or more modest requests and assumptions implemented in guidance, including CenterPoint Energy (CNP), Consolidated Edison, Edison International, PG&E (PCG), and Sempra (SRE).