2023-08-09 14:50:43 ET
Summary
- Evergy is upgraded from a sell to a hold based on fundamentals and improved technicals.
- The Utilities sector may see a bounce against the S&P 500 ETF in the coming months.
- Evergy's valuation is favorable, but challenges in the Kansas rate case and regulatory scrutiny pose risks.
- I outline key price levels to watch as we look out to the end of the year.
The Utilities sector has been a lousy area to be overweight in 2023. Negative alpha has been apparent for about 18 months, actually. I was on a show with JC Parets two weeks ago, and we hit on a few key broad market trends. Just yesterday, though, JC posted an intriguing chart (shown below) that suggests we are near a key inflection point for the XLU Utilities sector fund relative to the S&P 500 ETF. Could we see a bounce in Utilities during the final handful of months this year? I would like to see more evidence, but it is a plausible scenario.
Today, I am upgrading shares of Evergy (EVRG) from a sell to a hold based on fundamentals as well as its chart and momentum situations.
Could Utilities Bounce vs the S&P 500 Over the Balance of the Year?
According to Bank of America Global Research, EVRG was formed in 2018 by the merger of Westar and Great Plains with primary operations in Missouri and Kansas. It operates through its subsidiaries Westar Energy, Kansas City Power and Light (KCP&L), and Great Missouri Operations ((GMO)). Evergy serves approximately 1.6Mn electric customers with over 11GW of owned generation using over 13,000 miles of transmission and 52,000 miles of distribution assets.
The Kansas City-based $13.3 billion market cap Electric Utilities industry company within the Utilities sector trades at a near-market 17.7 trailing 12-month GAAP price-to-earnings ratio and pays a high dividend yield of 4.2%, according to Seeking Alpha. Following its early August earnings report, the stock has a low implied volatility percentage of 20% and short interest is modest at 0.9%.
Earlier this month, Evergy reported Q2 results that were not far from expectations. Operating EPS verified at $0.81, which was a $0.04 beat, while the management team reaffirmed its FY 2023 adjusted EPS (non-GAAP) earnings guidance of $3.55 to $3.75 per share. Shares traded lower in the days after the second quarter results were announced.
Before that, more key data were released in June. EVRG’s updated its Integrated Resource Plans ((IRP)) for its subsidiaries in Missouri and Kansas. The focus is shifting towards reliability, with reduced emphasis on renewables – a trend we might see playing out across other power markets. The latest IRP includes fewer wind and solar capacities in the near term, while its capital plan shows decreased spending on renewables, offset by investments in gas generation and transmission and distribution (T&D) infrastructure.
Challenges in the Kansas rate case and regulatory scrutiny are impacting the company's growth prospects, so that is a crucial risk to monitor over the coming quarters. Other broader risks include adverse regulatory outcomes, capex challenges, operational issues, and earnings uncertainty.
On valuation , analysts at BofA see earnings falling modestly this year before per-share earnings jump back by 8% in the out year. By 2025, non-GAAP EPS is seen climbing above $4. The Bloomberg consensus forecast is slightly more sanguine compared with what BofA projects. Dividends, meanwhile, are expected to rise at a steady pace, leading to a higher yield if the stock keeps its sideways price trend. With earnings multiples that are now nearly down to the mid-teens, the valuation picture looks more attractive considering that the company may be near trough earnings. As with many Utilities sector firms, free cash flow is negative given high capex.
Evergy: Earnings, Valuation, Dividend Yield Forecasts
If we assume next-12-month EPS of $3.80 and apply a sector median 17 P/E, then the stock should trade near $64, so it is a soft buy on valuation in my view. Consider that EVRG has historically been a 20x P/E company, so the current 16 forward operating earnings multiple is to the cheap side while other valuation metrics are generally favorable, leading to a Seeking Alpha B- valuation factor grade, which looks about right to me.
EVRG: Generally Favorable Valuation Metrics
Compared to its competitors, the valuation is in the middle of the road while the growth grade appears weak – but that is driven by the current year’s EPS drop expected. Overall, profitability is decent and while momentum is soft, the technical setup is not all that bad.
Peer Comparison
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q3 2023 earnings date of Friday, November 3 BMO. Before that, the stock trades ex its $0.613 dividend on Friday, August 18.
Corporate Event Risk Calendar
The Technical Take
Late last year, I issued a sell rating on EVRG. The stock has gone on to underperform the broader market by about 10 percentage points, despite posting a positive total return. Today, the chart is a bit more encouraging. Notice in the graph below that shares have key support in the $56 to $58 zone, and it just bounced off $57 earlier this month. I also note a downtrend resistance line that comes into play slightly higher than $61.
A breakout above that line would imply a bullish measured move price objective to about $70 based on the height of the descending triangle formed since I first analyzed EVRG. A bearish breakdown below $56, however, would lead to a price target of $47 – just under the September 2020 dip. Bigger picture, with a declining 200-day moving average, the bears appear in control. Moreover, its negative alpha this year is another ding against a buy rating.
Overall, while there are some encouraging signals, the chart is merely neutral.
EVRG: Broad Rounded Top, but Key Support in Play
The Bottom Line
I am upgrading EVRG from a sell to a hold. The valuation situation continues to look decent, while the technicals have improved enough to turn slightly more bullish.
For further details see:
Evergy: Now Yields Above 4%, EPS Growth Not Far Off (Rating Upgrade)