Analyst: Utilities 'Desperation' Creates Value
The "desperation" by utilities to consolidate, mutate or get out
of the business altogether is a good thing, said utilities analyst
Daniel Ford of ABN AMRO, because this fear is where most of the
stock values are now being created. Ford, a keynote speaker at last
week's PowerMart 2000 in Houston, called investors a "fickle
bunch," but added they are sticking with utility stocks.
One of the things investors like the most is change, said the
managing director of utility research for ABN AMRO. "Companies have
to change their strategies to fit what investors want. That is
Investors invest in "themes," said Ford, and suggested that
utilities looking for better stock performance look for new ways to
enhance their business. To make the stock more exciting, Ford
recommended one of two paths: develop a substantial non-regulatory
growth business, or sell it for cash.
"On the non-regulatory side, we see that happening more and
more," he said. These are the companies that are having the best
stock performance. If they can't expand their businesses, then he
recommended they sell them.
"What doesn't work are paper mergers, rate cases and leverage,"
Ford said. "Companies that have overextended their balance sheets
are not going to last."
Most of the outstanding growth in utility stocks is coming in
three areas, through telecommunications infrastructure; independent
power and convergence; and in the electro-technology fields. If a
company has not already begun to invest in telecommunications, Ford
said, "frankly, that was last year's story. It's almost too late to
get into that now." He said the story now is in bandwidth, and
companies willing to change already are filling that marketplace.
The electro-technology field includes the small niche "cottage
industries," said Ford, and these attract a lot of attention from
investors. If a utility finds the right type of technology to
invest in and make a part of its business, then these can add stock
Most of the attention is in the growth of independent power and
in convergence, he said. "There is a lot of opportunity there."
Calling electricity the "most volatile market the world has ever
known," Ford said that there aren't many players in this market,
and the United States needs more resources, starting with
"Turn out the lights in the U.S. if we don't do something
quickly," said the analyst.
Only a few "meaningful" power companies are now traded in the
United States, he said, mentioning Calpine, AES, Dynegy, NRG, El
Paso and the utilities with large IPPs. "These are very attractive
Ford said that natural gas, already a huge growth area, would
continue to stay on an upward path - but it's continued strong
growth actually may depend on who is elected president in November.
A win, he said, by Vice President Al Gore (D), would guarantee more
natural gas production. "He will get the gas plants." He didn't
mention what Republican nominee, Texas Gov. George W. Bush, might
Ford also said to be prepared for winter natural gas spikes of
$6 to $7 in the next few months if the season is normal. "Gas plays
right now are incredibly attractive."
Carolyn Davis, Houston