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4 Utility ETFs Gaining Despite Lackluster Q4

At the tail end of the earnings season, the retail and utility sectors are the only ones with a number of companies yet to report results. As per Earnings Trend report, earnings of all the utility companies that have reported so far are down 5% year over year for the fourth quarter of 2015, with 21.4% of the companies beating the Zacks Consensus Estimate. Meanwhile, revenues are down nearly 13.3% for the quarter, with none of them surpassing the Zacks Consensus Estimate. The utility sector failed to impress in its fourth-quarter results with earnings and revenue miss from some of the major players in the space, including Duke Energy Corporation (NYSE: DUK ) and Dominion Resources Inc. (NYSE: D ). Although some companies like NextEra Energy (NYSE: NEE ) managed to beat on earnings, revenues came short of expectations. However, the slowdown in U.S. economic growth, Chinese market turbulence and plunging oil prices along with other factors resulted in a bearish environment, which led to demand for securities from sectors that provide a safer option. Thus, the utility sector, which is considered to be one of the safer options when the market is exhibiting a high level of volatility, managed to remain in the green over the last one month despite lackluster results (read: 3 Utility ETFs in Focus on Market Downturn ). Below we have highlighted the quarterly results of the aforementioned utility companies in detail. Duke Energy Duke Energy reported adjusted earnings of 87 cents per share for the quarter that fell short of the Zacks Consensus Estimate of 94 cents by 7.4%. However, quarterly earnings increased by a penny year over year on the back of higher retail pricing and wholesale margins in the regulated business. Total revenue was $5,351 million, lagging the Zacks Consensus Estimate of $5,709 million by 6.3%. The company has provided 2016 earnings guidance in the range of $4.50 to $4.70 per share. Shares of the company declined 1.4% (as of February 19, 2016) since its earnings release. NextEra Energy NextEra Energy’s quarterly adjusted earnings of $1.17 per share beat the Zacks Consensus Estimate of $1.11 by 5.4%. Earnings climbed 13.6% year over year on the back of higher revenues from Florida Power & Light Company. However, revenues of $4,069 million missed the Zacks Consensus Estimate by 2.6% and decreased 12.8% from the year-ago level. NextEra reiterated its earnings guidance of $5.85-$6.35 for 2016. Shares of the company went up 7.5% since its earnings release (as of February 19, 2016). Dominion Resources Dominion Resources’ quarterly earnings of 70 cents per share lagged the Zacks Consensus Estimate of 87 cents by 19.5%. Earnings decreased 16.7% from 84 cents per share in the prior-year quarter due to mild weather conditions in its service territories, absence of a farmout transaction and the impact of bonus depreciation. The company’s operating revenues of $2,556 million also missed the Zacks Consensus Estimate of $4,092 million by 37.5% and declined about 13.1% year over year. Dominion expects to earn 90 cents to $1.05 per share for the first-quarter 2016 compared with 99 cents per share in the year-ago period. The company expects earnings for 2016 in the range of $3.60 to $4.00 per share. Shares of the company fell 3.8% since its earnings release (as of February 19, 2016). ETFs in Focus Mixed results notwithstanding, many utility stocks managed to hold up gains over the past one month, sending the related ETFs higher. This has put the spotlight on utility ETFs. Below we discuss four of these ETFs having a sizeable exposure to the above stocks, holding Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see all Utilities/Infrastructure ETFs here ). Utilities Select Sector SPDR (NYSEARCA: XLU ) XLU is one of the most popular products in the space with nearly $7.6 billion in AUM and average daily volume of roughly 14 million shares. The fund tracks the Utilities Select Sector Index and holds 31 stocks with NextEra Energy, Duke Energy and Dominion Resources among the top five spots with a combined exposure of nearly one-fourth of its total assets. Sector-wise, Electric Utilities (57.82%) dominates the fund followed by Multi-Utilities (38.85%). The fund charges 14 bps in investor fees per year. The ETF has posted gains of 7.3% in the past month (read: 4 Utilities to Buy in a Bear Market ). Vanguard Utilities ETF (NYSEARCA: VPU ) This ETF tracks the MSCI US Investable Market Utilities 25/50 Index. The fund holds 82 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources occupy the top four positions in the fund with a combined exposure of a little more than 20%. More than half of the fund’s assets are invested in Electric Utilities followed by Multi-Utilities (33.8%). The fund has amassed almost $2 billion in its asset base and trades in a moderate volume of 175,000 shares per day. The fund has a low expense ratio of 0.10%. The ETF has surged 7.6% in the last one-month period. iShares Dow Jones US Utilities (NYSEARCA: IDU ) The fund follows the Dow Jones U.S. Utilities Sector Index and holds 59 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are placed among the top five stocks in the fund, together accounting for a share of more than 21% of total assets. On a sectoral basis, Electric Utilities (53.28%) and Multi-Utilities (34.51%) hold the top two positions in the fund. The fund manages an asset base of around $764 million and exchanges about 199,000 shares per day. It is a bit expensive with 44 bps in annual fees. IDU was up 7.5% in the last one-month period. Fidelity MSCI Utilities ETF (NYSEARCA: FUTY ) This ETF tracks the MSCI USA IMI Utilities Index. The fund holds 83 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are among the top four in the fund with a combined exposure of a little more than 20%. More than half of the fund’s assets are invested in Electric Utilities followed by Multi-Utilities (33.8%). The fund has amassed almost $231 million in its asset base and trades in a moderate volume of 140,000 shares per day. The fund has an expense ratio of 0.12%. FUTY was up 7.5% in the last one-month period. Original Post

Do TIPS ETFs Deserve A Look As Inflation Rises?

Inflation has been floppy for most developed economies, including the U.S., for quite some time now. Reaching 2% inflation – as targeted by most of the central banks – has become a tall order, with both the eurozone and Japan struggling to ward off deflation. The nagging oil price crisis over the last one and a half years seems to be the main culprit. While the ECB and Bank of Japan were compelled to pursue QE measures to fight deflationary threats. Back home, subdued inflation checked the Fed from being aggressive on the policy tightening issue. Even after the lift-off in December, market watchers were under the impression that the Fed will likely apply a single hike, at the most, this year, thanks to the global market upheaval and subdued inflation. In such a scenario, the U.S. inflation rate rose 1.4% for the fourth successive month in January – the best annual gain last seen in October 2014, and surpassing market expectations of a 1.3% gain. Core consumer price index (CPI) jumped to 2.2% in January. The reading was the highest since June 2012, and it came above the goal set by the Fed at 2%. Higher rents, healthcare and transportation costs boosted inflation in January. Excluding food and energy, consumer prices rose 0.3% in January – a four and-a half year high, and higher than the last month’s increase of 0.2%. Time for TIPS ETFs? TIPS offers robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated principal amount (principal rises with inflation), and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on rising with increasing consumer prices. This mechanism makes TIPS ETFs investors’ darlings in times of rising inflation. Presently, the iShares TIPS Bond ETF (NYSEARCA: TIP ) is one of the biggest beneficiaries of this trend, having hauled in $256.5 million last week. The fund is up 1.5% this year (as of February 19, 2016). Is the Bet Worth It? Though the decline in oil prices has slowed, things are yet to stabilize in the oil patch. So, it is too early to take a call on the inflation picture. Of course, the recent trend is pointing toward solid inflation, and the upbeat January data has made the case stronger for faster Fed tightening. However, a lot of the future trend of inflation depends on the movement of energy prices. Still, investors with a long-term view can count on the potential uptick in inflation, as the U.S. economic backdrop remains more or less ,steady and issues in the energy space should be sorted sooner or later. With the economy and the job market mending, inflation will definitely increase in coming months. Below, we highlight a few outperforming TIPS ETFs which could be compelling investments if U.S. inflation continues to rise (see all TIPS ETFs here ). PIMCO 15+ Year U.S. TIPS Index ETF (NYSEARCA: LTPZ ) This fund targets long-term securities of the TIPS market by tracking the BofA Merrill Lynch 15+ Year US Inflation-Linked Treasury Index. In total, the product holds 7 bonds having effective maturity of 26.41 years and carrying a high interest rate risk, given the effective duration of 21.83 years. In terms of credit quality, the fund boasts top-rated bonds from Moody’s and the S&P, suggesting lower default risk. The ETF is less popular and less liquid, with AUM of $98.1 million. LTPZ has generated excellent returns of about 3% so far this year (as of February 19, 2016). SPDR Barclays Capital TIPS ETF (NYSEARCA: IPE ) This fund targets long-term securities of the TIPS market by tracking the Barclays Capital U.S. Government Inflation-Linked Bond Index. In total, the product holds 37 bonds having effective maturity of 9.08 years and carrying a moderate interest rate risk, given the effective duration of 4.90 years. In terms of credit quality, the fund boasts top-rated bonds. The ETF is moderately popular and less liquid, with AUM of $637.5 million. IPE has gained about 1.6% so far this year (as of February 19, 2016). PIMCO Broad U.S. TIPS ETF (NYSEARCA: TIPZ ) This $66.4 million fund looks to track the BofA Merrill Lynch US inflation-linked Treasury index. The fund holds 19 securities and has an effective maturity of 9.09 years, while its effective duration is 8.26 years. It charges 55 bps in fees, and is up 1.8% so far this year (as of February 19, 2016). Original Post

Earnings Review: Drought, Currency Impact On International Business Dents Duke’s Q4 Results

The largest electric utility company in North America, Duke Energy (NYSE: DUK ) reported its fourth quarter and full-year earnings for the fiscal-year 2015 on Thursday, February 18th. The company reported adjusted earnings per share of 87 cents, 7% below consensus estimates of 94 cents . Management attributed the earnings miss on the impact of mild weather conditions and the negative impact of currency translation, as revenue earned from international operations in South America was worth less when translated back into the U.S. dollar. For the full year, revenue stood at $23.46 billion , down 2% from 2014’s $23.93 billion. Operating income rose by 2.1% year over year as operating expenses fell by close to 3% on lower fuel expenses. The decline in operating costs was offset by higher operation and maintenance expenses, as well as higher depreciation and amortization expenses. Segment wise, increased pricing as well higher wholesale net margins led to a 9% increase to $601 million in the reported adjusted income of the Regulated Utilities division. Lower margins for National Methanol and the unfavorable impact of currency translations meant that the adjusted income of the International Business dropped by 5.6% to $68 million for the full year. The company’s commercial power business reported an adjusted income of $41 million for the full year, up 28% from last year’s $32 million, on the back of higher margins in wind and solar generated power. The commercial power business which now includes unregulated renewable assets and commercial electric and gas transmission investments but not the Midwest Commercial Generation business, which the company sold to Dynergy last year. We have a $68 price estimate for Duke Energy , which is about 9% below the current market price. Key Drivers For 2016 Due to a tougher regulatory environment, Duke has had to forego short-term profitability and focus on optimizing its asset base. The company has focused on increasing investments in natural gas and renewables, while getting lowering its exposure to unregulated markets. In 2016, the company expects most of its growth in the regulated utilities business to come from opportunities that will be unlocked by the $5 billion investments in growth that it has made. Management expects retail load to grow by around 0.5% year over year, and that should result in some bottom-line growth for the company. Most of its growth in 2016 is expected to result from the integration of the North Carolina Eastern Municipal Agency’s (NCEMPA) assets that it purchased for $1.25 billion and closed in July of last year. Additionally, the company has been focusing on reducing operational and maintenance costs. On the commercial power front, Duke expects to benefit from a $1.5 billion investment in Renewables and from its stake in the joint venture in the Atlantic Coast pipeline with Piedmont and Dominion. However, there has been a lag in getting regulatory approval for operations in certain jurisdictions. This, coupled with the loss of earnings from the Midwest power generation business, will offset some of the gains from new investments. On the international front, management said that reservoir levels in Brazil increased throughout 2015, which will enable the company to purchase power at a lower cost in 2016, resulting in higher margins. However, lower exchange rates between currencies in South America and the U.S. dollar, and low Brent crude oil prices, will mean lower revenue for the company’s National Methanol business. Additionally, Duke is considering exiting from its international business, but no timeline has been specified on this front, making the performance of the international business in 2016 less important. Most of Duke’s growth will come from its core business, which the company expects to grow between 4% and 6% in 2016. Disclosure: No positions.