Southern Company (SO) stock seems to have slowed down a bit recently after a 40% run so far this year. The utility is expected to release its third-quarter earnings by the end of this month. Apart from Southern Company’s bottom line, the management commentary regarding its Vogtle project could pave the way for the stock for the rest of the year.
Positive developments at Plant Vogtle led largely to Southern Company’s rally this year. Interestingly, the rosy outlook for Plant Vogtle could boost the stock in the short term. However, valuation concerns remain.
J.P. Morgan sees little upside in SO
On October 14, J.P. Morgan announced a price target of $63.00 on Southern Company stock for December 2020. That represents a potential upside of just 4% of the current market price of $60.70.
Falling interest rates amid broader market volatility benefited utilities this year. The Utilities Select Sector SPDR ETF (XLU) is up about 20%, notably outperforming the broader market S&P 500 index. XLU represents the top utility stocks in the country.
We expect interest rates to trend lower at least this year. This trend might continue to benefit utilities, including Southern Company.
Southern Company stock is currently trading almost 2% and 12% above its 50-day and 200-day simple moving average levels, respectively. The premium against both key support levels highlights the strength in the stock. However, its 50-day level of $59.70 could act as a crucial support for the stock in the short term.
Importantly, SO stock has never broken below the 50-day level since the start of the year. If Southern Company stock breaches below this level, the stock could see more downside in the short term.
Southern Company’s RSI (relative strength index) was close to 36 on October 15. This RSI level indicates that the stock is close to the oversold zone and could see a trend reversal.
How is Southern Company stock valued?
Southern Company stock is trading at a PE (price-to-earnings) valuation of 19x its estimated earnings for the next year. Its five-year historical average valuation is close to 17x, which indicates that the stock is trading at a premium.
Peer NextEra Energy (NEE) stock is trading at a PE of 25x, much higher than its historical average. NextEra Energy stock rallied more than 30% so far this year. The top utility stocks’ premium valuations might concern investors. Their inflated valuations suggest that the upward movement from here could be limited.
Wall Street analysts expect Southern Company to report earnings per share of $1.16 in the third quarter. This represents flattish growth compared to the third quarter of 2018. However, investors seem to be keen on Plant Vogtle updates rather than the bottom line.
Notably, Southern Company is trading 2.7% below its 52-week high hit last month. It had rallied almost 43% from its 52-week low of $42.50 in December 2018. The stock is up more than 10% since its second-quarter earnings report on July 31. Southern Company beat Wall Street’s EPS expectations for the quarter and posted flattish growth compared to Q2 2018.
Southern Company is expected to pay a dividend of $2.46 per share for 2019. That brings its dividend yield around 4.0%, notably higher than that of the utilities’ average. Plus, it has increased its per-share dividends for the last 18 consecutive years. To learn more about Southern Company’s dividend profile, please read Dividend Faceoff: Southern Company vs Duke Energy.
Based on analysts’ consensus estimates, Southern Company stock has a mean target price of $59.40. This indicates a downside of 2% for the next year. Among the 19 analysts tracking the stock, 12 recommend it as a “hold,” four recommended it as a “sell,” one recommended it as a “strong sell,” and two analysts recommended the stock as a “buy.”
Renewables giant NextEra Energy (NEE) stock has a mean price target of $230.10 for the next year. This implies a potential upside of just 1% based on its current market price of $227.50. J.P. Morgan gave NextEra Energy stock a mean price target of $252.00 for December 2020.
For more on this industry, please read Why Utilities Could Keep Smashing in the Fourth Quarter.