Southern Company (SO) stock continued its uptrend and rose 0.5% last week. The Georgia-based Southern Company has gained more than 42% so far this year, making it one of the strongest ralliers in the industry. The Utilities Select Sector SPDR ETF (XLU) has rallied 23% while the broad market index S&P 500 has surged 18% year-to-date.
Brokerages raise Southern Company’s price targets
Brokerages remain positive on Southern Company stock. SunTrust Robinson Humphrey raised its target price from $59.00 to $62.00 today. Mizuho Securities also raised Southern Company’s target price from $60.00 to $62.00.
Based on analyst estimates, Southern Company stock has a mean target price of $58.50, which indicates a downside of almost 6% for the next year. The stock closed at $62.05 last week.
Among the 19 analysts tracking Southern Company on October 7, four analysts recommended it as a “sell,” and one recommended it as a “strong sell.” Twelve analysts recommended SO stock a “hold,” and two recommended it as a “buy.”
Southern Company stock is trading almost 5% and 16% above its 50-day and 200-day simple moving average levels, respectively. The fair premium to these key support levels indicates the strength in the stock. Southern Company stock crossed above both levels early this year and hasn’t fallen below these levels so far.
On the downside, its 50-day level of $59.00 could as a support in the short term. The stock is currently trading close to the overbought zone with its RSI (relative strength index) at 67.
Southern Company stock exhibited an implied volatility level of close to 18% last week, which was higher than its long-term average. Implied volatility measures investor anxiety. In comparison, utilities’ average volatility was around 12%, and the broader markets’ average volatility was 15% recently.
Atlantic Coast Pipeline
The US Supreme Court agreed to hear Dominion Energy’s (D) appeal regarding its Atlantic Coast Pipeline, Reuters reported on Friday. Southern Company and Duke Energy (DUK) are partners in the $7.5 billion natural gas pipeline project.
Environmentalists sued to stop the construction after the Forest Service approved the part of the project that stood on National Park Service land. The pipeline has been under construction since spring 2018. These delays have increased its costs from $6.0 billion–$6.5 billion to $7.5 billion.
Southern Company’s earnings and Plant Vogtle
The main reason behind this year’s rally in Southern Company stock is its progress related to Plant Vogtle. After multiple cost overruns and project delays, the Vogtle project hampered the utility last year. However, the project made some crucial developments this year. The company has not revised the total project cost so far this year.
The company’s management announced that the project was 79% complete in July. It expects its two reactors to be in service by November 2021 and 2022, respectively. Plant Vogtle is the only nuclear power plant under construction in the US. The project has been delayed for five years and could cost more than $27 billion, double its original estimate.
We expect investors to anticipate Southern Company’s recent updates on Plant Vogtle. The company plans to release its quarterly earnings and Vogtle updates on October 30. For the third quarter, the utility is estimated to report revenues of $6.18 billion, representing flattish top-line growth year-over-year.
The lower revenues could be due to its asset sale to NextEra Energy (NEE) last year. Based on estimates, Southern Company could report EPS of $1.14 for the third quarter. In Q3 2018, it also reported earnings per share of $1.14. In the second quarter, SO also reported flattish earnings growth YoY.
Lower rates could help
Southern Company stock could continue to rally as the Fed might lower the benchmark interest rates further. Interest rates and utility stocks generally trade inversely to each other. The Fed has delivered two quarter-point rate cuts in July and September this year. Interestingly, Southern Company stock has rallied almost 13% since the first rate cut in July. Market participants are expecting one more cut this year.
Utilities have represented one of the sweet spots among the broader markets this year. The defensives have returned more than 25% (including dividends), significantly outpacing the S&P 500. To learn more about how utilities traded recently and where they might go in the near future, please read Why Utilities Could Keep Smashing in the Fourth Quarter.
Investors generally prefer utility stocks due to their stable dividend payments. Southern Company is one of the top-yielding utility stocks among its peers. However, there are some utility stocks that look more attractive due to their dividend yields. To learn more, please read Two Top Utilities that Beat Southern Company’s Yield.