Will Southern Company See Earnings Fall?

By Dan Caplinger Markets Fool.com

The utility industry has been under pressure lately, and Southern Company (NYSE: SO) has seen its stock decline somewhat from levels earlier in the year. Utilities tend to be sensitive to interest rates, both because their slow-growth business operations make their stocks trade more like bonds and because they tend to have extensive debt that costs more to maintain when rates rise.

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Coming into Southern Company's fourth-quarter financial report on Feb. 22, shareholders in the utility are bracing themselves for a significant drop in earnings, even though they also believe that revenue will be considerably higher than it was in the year-ago quarter. Let's take an early look at Southern Company to see what investors are thinking and what the utility giant is likely to say.

Image source: Southern Company.

Stats on Southern Company

Analyst EPS Estimate

$0.33

Change From Year-Ago EPS

(25%)

Revenue Estimate

$4.42 billion

Change From Year-Ago Revenue

23%

Earnings Beats in Past 4 Quarters

4

Data source: Yahoo! Finance.

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What's ahead for Southern Company earnings?

In recent months, investors have gotten significantly less optimistic about Southern Company's immediate earnings prospects. They've cut their fourth-quarter projections by $0.05 per share, although they've left their full-year predictions for 2016 and 2017 unchanged. The stock has also suffered slightly, falling 2% since early November and missing out on what has been a solid market rally for most stocks.

Southern Company's third-quarter results in late October were generally favorable, showing solid growth in both revenue and profit. Sales were up 16%, driven largely by the addition of revenue from the utility's natural gas joint venture. Retail electric revenues were generally higher, and wholesale activity was also relatively strong. Net income climbed almost 10% on an adjusted basis, and warmer than normal weather conditions helped to boost Southern Company's overall results.

Since then, though, Southern Company has faced some changed conditions. The outcome of the presidential election marked what could be a huge shift in the regulatory environment for utility companies, which until now have had to move away from coal toward natural gas. Moreover, Southern has dealt with the complexities of its nuclear plant assets, and a more favorable attitude toward nuclear power could help Southern going forward. Yet what the ultimate impact on the economics of power production will end up being is completely unclear at the moment, and investors will have to wait along with Southern for signs on what the nation's new energy policy might be going forward.

In addition, Southern Company is now looking at more realistic prospects for rising interest rates in the near future. Already, the Federal Reserve boosted short-term interest rates in December, and the bond market pushed long-term rates sharply higher immediately after the November election. If that marks the beginning of a trend, then it could eventually lead to significant increases in financing costs that could eat further into Southern's bottom line.

Southern has also moved forward with continuing investment in renewable energy projects. In December, the company's Garland Solar Facility in California began operation, with the potential to produce 200 megawatts of power and join a total of 11 solar projects either in place or under construction within the Golden State. At the same time, Southern has also invested in a number of wind projects lately, including two in late December totaling 300 megawatts and another in January for another 276 megawatts, all in Texas. Renewable energy credits give Southern some useful assets and also give the utility diverse production capacity.

In the Southern Company earnings report, investors should look to management's discussion of how the utility expects to move forward under the Trump administration and whether it sees regulatory constraints easing up in the near future. The long-term impact on Southern's fundamental business is far more important than any short-term impacts on earnings. Moreover, if an adverse interest rate environment is in fact here, then Southern Company will have to work even harder to ensure that it can take advantage of growth opportunities in the power industry going forward.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.