Southern Co. (So): Buy or Watch Ahead of Earnings?

The Southern Company (SO) is scheduled to report its fourth-quarter and full-year results on February 15. Wall Street expects the company to post higher earnings and revenue over the prior-year quarter. In this piece, I have discussed why it could be wise to wait for a better entry point in the stock now despite the potential rise in earnings and revenue during the fourth quarter.

For the fourth quarter, SO’s EPS and revenue are expected to increase 131.2% and 4.6% year-over-year to $0.60 and $7.37 billion, respectively. The company has a stellar earnings history, having beaten the consensus EPS estimate in each of the trailing four quarters.

During the third quarter, SO’s revenues fell year-over-year. Similarly, its operating revenues for nine months ended September 30, 2023, declined 13.6% year-over-year. The company blamed the declines on last year’s lower fuel costs. For nine months ended September 30, 2023, the company added approximately 35,000 residential electric customers and 19,000 gas customers.

However, its third-quarter adjusted earnings came above Wall Street estimates due to warmer-than-normal weather, changes in rates and pricing, lower income taxes, and non-fuel operations and maintenance costs. Unit 3 of the Vogtle nuclear project started operation on July 31, 2023.

Commenting on its third-quarter performance, SO’s President and CEO Christopher C. Womack said, “Our premier state-regulated electric and gas utilities continued to perform well during the third quarter, and Southern Power made strategic additions to its portfolio of renewable generation assets.”

“It is also significant to note that the accelerated economic development we have seen in the Southeast over the last couple of years has contributed to a projected growth in electricity usage that is significantly larger than historic levels,” he added.

For fiscal 2023, SO’s adjusted EPS is projected to be at the mid-point of its guidance of $3.55 and $3.65. For the fourth quarter, the company expects its adjusted EPS to come in at $0.59. According to the 2023 Georgia Power Integrated Resource Plan (IRP), more than 6 GW (gigawatt) of projected peak load growth is expected by 2030/2031.

In late September, SO announced the acquisition of its 30th solar project and the first in Wyoming, the 150-megawatt (MW) South Cheyenne Solar Facility from Qcells USA Corp. During the same period, the company announced the acquisition of the 200-megawatt Millers Branch solar facility in Texas from EDF Renewables. The commercial operation of these facilities is expected in 2024 and 2025, respectively.

These projects are the latest additions to SO’s portfolio of 5,500 megawatts of carbon-free generating capacity. SO has a goal of achieving a 50% reduction in emissions by 2030 from 2007 emission levels and reaching net zero greenhouse gas emissions by 2050.

During the fourth quarter, the U.S. General Services Administration (GSA) announced a MOU between GSA and SO to develop carbon pollution-free electricity options for federal facilities in SO’s service territories.

On November 9, 2023, U.S. Army Garrison Eisenhower and SO’s subsidiary Georgia Power partnered on a strategic objective to accelerate the access, adoption, and usage of electric vehicle (EV) charging through the installation. The utility privatization (UP) contract entered by Georgia Power with Fort Eisenhower will see the company own, maintain, and manage the EV infrastructure and charging program at the installation.

SO’s stock has declined 8% over the past nine months and gained 0.6% over the past year to close the last trading session at $67.51.

Here’s what you might want to consider ahead of its upcoming earnings release:

Mixed Financials

SO’s total operating revenues for the third quarter ended September 30, 2023, declined 16.7% year-over-year to $6.98 billion. Its natural gas revenues declined 19.6% over the prior-year quarter to $689 million.

On the other hand, its adjusted net income rose 9.6% year-over-year to $1.55 billion. Also, its adjusted EPS came in at $1.42, representing an increase of 8.4% year-over-year.

Mixed Analyst Estimates

Analysts expect SO’s EPS and revenue for fiscal 2023 to decline marginally and 8.7% year-over-year to $3.60 and $26.72 billion, respectively. Its fiscal 2024 EPS and revenue are expected to increase 11.4% and 4.1% year-over-year to $4.01 and $27.83 billion, respectively.

Mixed Profitability

In terms of the trailing-12-month EBITDA margin, SO’s 39.01% is 17% higher than the 33.35% industry average. Likewise, its 9.69% trailing-12-month Return on Common Equity is 7.5% higher than the industry average of 9.02%. Also, its 34.21% trailing-12-month Capex/Sales is 12.1% higher than the industry average of 30.53%.

On the other hand, SO’s 0.19x trailing-12-month asset turnover ratio is 14.3% lower than the 0.22x industry average. Its 2.19% trailing-12-month Return on Total Assets is 6.9% lower than the 2.35% industry average.

Stretched Valuation

In terms of forward non-GAAP P/E, SO’s 18.76x is 20.5% higher than the 15.57x industry average. Its 3.33x forward non-GAAP PEG is 34.4% higher than the 2.47x industry average. Likewise, its 22.92x forward EV/EBIT is 27% higher than the 18.05x industry average.

POWR Ratings Reflect Uncertainty

SO has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SO has a D grade for Value, consistent with its stretched valuation. It has a C grade for Quality, in sync with its high profitability.

Its mixed analyst estimates justify its C grade for Sentiment.

SO is ranked #15 out of 63 stocks in the Utilities – Domestic industry. Click here to access SO’s Growth, Momentum, and Stability ratings.

Bottom Line

SO’s future outlook looks optimistic as it is actively adding renewable energy generation assets to its portfolio. Also, the pace of economic development in the Southeast is expected to aid electricity usage growth, boosting the company’s prospects. However, with the delay in the start of commercial operations of Unit 4 of the Vogtle nuclear project, Georgia Power will lose $30 million in profit for every month beyond March.

In case the project does not begin by June 30, the company will have to pay $15 million a month in extra construction costs if the project extends into July.

Despite the long-term growth prospects, SO currently trades at an expensive valuation. Given its mixed fundamentals, sentiment, and quality, it could be wise to wait for a better entry point in the stock.

How Does The Southern Company (SO) Stack Up Against Its Peers?

SO has an overall POWR Rating of C, equating to a Neutral rating. You may check out these A and B-rated stocks within the Utilities – Foreign industry: Centrica plc (CPYYY), AGL Energy Limited (AGLXY), and TransAlta Corporation (TAC). For exploring more Buy-rated Utilities – Foreign stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

SO shares fell $0.07 (-0.10%) in premarket trading Wednesday. Year-to-date, SO has declined -3.82%, versus a 4.44% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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