Why Did Analysts Give Xcel Energy Inc. (XEL) a Moderate Buy Rating?

We recently compiled a list of the 10 Best Utility Stocks to Buy Now. In this article, we are going to take a look at where Xcel Energy Inc. (NASDAQ:XEL) stands against the other utility stocks. You can also check out the 20 States With the Most Expensive Electricity In The US here.

The power and utilities industry in 2023 saw mixed outcomes. Despite a 53% year-on-year drop in natural gas prices for power generation, customer bills went up by 1.9%. This increase was due to record-breaking investments of nearly $171 billion in grid modernization and decarbonization efforts, along with rising interest rates. Overall, electricity sales dipped slightly by 1.2% year-on-year (YoY).

Looking ahead to 2024, the outlook for clean energy is bright. Forecasts predict stable electricity prices alongside a 2% growth in sales. This growth is fueled by a rise in clean energy investment, from both utility companies and the government. Investments are being directed towards renewable energy generation, with solar expected to double in capacity in 2024.

The U.S. Energy Information Administration (EIA) forecasts a significant year for solar power, with utilities planning a 30% increase in capacity by adding 31 gigawatts. Wind energy is also projected to grow by 5% or 7 gigawatts. As a result, solar and wind power are set to become the dominant sources of electricity generation in the US, potentially surpassing coal. Renewables are expected to reach 18% of total generation, while coal may fall to 17%, marking a historic milestone in the transition to cleaner energy sources.

Moreover, there is a forecast of accelerating demand for electricity in the US in the next few years. According to a report by consulting firm Grid Strategies, electricity demand forecasts for 2024 have been significantly revised upward based on filings submitted to the Federal Energy Regulatory Commission (FERC) in 2023. Grid planners now anticipate a nationwide increase of 4.7% over the next five years, which is a sharp rise from the 2.6% growth projected just last year. This rise in demand is expected to be accompanied by a substantial increase in peak demand, with forecasts indicating a growth of 38 gigawatts (GW) over the next five years.

This increase in electricity demand is driven by multiple factors. Industrial facilities, manufacturing plants, and data centers are experiencing a construction boom, with data centers in some areas like Virginia seeing unprecedented growth at 6% to 8% every year. Electric vehicles are also expected to contribute to the demand increase as BloombergNEF (BNEF) forecasts a 20% YoY increase in global battery electric and plug-in hybrid vehicle sales in 2024.

On the supply side, challenges remain. According to Senior Partner for Energy & Utilities at West Monroe, Danny Freeman, utilities are going to prioritize grid reliability and resilience in response to climate change.  Extreme heat and drought are likely to continue disrupting power generation in 2024, with summer 2023's record-breaking heat likely marking the start of a long-term trend.

The American West is facing its driest period in 1,200 years, and researchers predict a long-term pattern of aridification.  These conditions can significantly reduce power output, especially during peak demand periods. Thus, the Department of Energy (DOE) awarded $3.5 billion in October 2023 to projects that will improve grid flexibility and resilience. The funding for this project is provided by the Grid Resilience Program (GRIP), created by the Infrastructure Investment Jobs Act (IIJA).

The rapid transformation of the utilities sector presents many exciting opportunities for investors. With this context in mind, let’s take a look at the 10 best utility stocks to buy now.

Our Methodology

To shortlist the best utility stocks, we relied on Insider Monkey’s database of 920 hedge funds as of Q1 2024 to analyze the hedge fund sentiment for each stock. We picked the utility stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A vast expanse of solar panels stretching as far as the eye can see.

Xcel Energy Inc. (NASDAQ:XEL)

Number of Hedge Fund Holders: 36

Xcel Energy Inc. (NASDAQ:XEL) delivers electricity and natural gas across eight states in the US through its subsidiaries. The company generates power from a mix of sources, including renewables like wind and solar, alongside traditional options like coal and gas. It also distributes and transports natural gas, and invests in gas infrastructure development.

As per the Q1 2024 earnings report, Xcel Energy Inc.’s (NASDAQ:XEL) earnings per share rose to $0.88 from $0.76 a year ago. Net profit margin was recorded at 13.4%, reflecting a year-on-year increase of over 30%. The increase in net income has been due to higher recovery of infrastructure investments and lower operating expenses, partially offset by interest charges and depreciation.

The stock is rated as a Moderate Buy by analysts, with an average 12-month price target of $62.33, suggesting a potential upside of over 16.7% from its current price levels. The highest analyst forecast is $66, while the lowest is $57.

Here’s what Aristotle Capital Management, LLC, said about Xcel Energy Inc. (NASDAQ:XEL) in its Q1 2024 investor letter:

“Xcel Energy Inc. (NASDAQ:XEL), one of the largest renewable energy owners among regulated utilities, was a primary detractor during the period. Shares fell as the company’s facilities appear to have been involved in an ignition of the largest wildfire in Texas state history. As a result, insurance companies have begun filing lawsuits claiming Xcel should be held liable for damages related to the more than one million acres burned. Though the magnitude and likelihood of settlements are difficult to quantify, we believe potential payouts would be meaningfully less than the over $5 billion in market value the company lost in the days following the news. We will continue to closely monitor the situation and its impact on the company, as a full investigation is still underway. Over the long term, our conviction remains that Xcel is well positioned to benefit from increased demand for clean energy, as its service territories have what we believe to be some of the best wind and solar resources in the country.”

Overall XEL ranks 7th on our list of the best utility stocks to buy. You can visit 10 Best Utility Stocks to Buy Now to see the other utility stocks that are on hedge funds’ radar. While we acknowledge the potential of XEL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than XEL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.

 

Disclosure: None. This article is originally published at Insider Monkey.