Investors Take a Watch-and-See Attitude

On the eve of dramatic changes in the electric utility industry that promise big winners and losers, the stock market seems tentative. Most industrial stocks are selling at an average of 22 times their annual earnings, but leading utility stocks are selling at a mere 13 times earnings on average.

Why should that be? “Investors see slow, 1% to 2% annual growth in electricity,” says analyst John Edwards of Redwood Securities, a San Francisco investment firm specializing in utilities.

Lately, some stocks have been rising, mostly because investors see companies reaching for alternatives to electricity. Western Resources, the parent company of Kansas Power & Light, hit new highs last week as it made an acquisition in home security services. The stock of Edison International has been rising, partly because the company is buying back its stock.

But for the most part investors are waiting and watching.

So which companies might emerge big winners? Obviously, it’s too soon to say. But many analysts pick Duke Power, which is acquiring natural-gas supplier PanEnergy of Houston, because Duke will be able to reach customers all over the country.

Other analysts favor Pacificorp because the Oregon-based company has low-cost power generation and transmission lines.

Edwards doesn’t yet see a big winner, but favors Sierra Pacific Resources, a small utility in rapidly growing Reno.

Perhaps the real bottom line is that at a time of investor frenzy about every other industry, utilities deserve a look--because they are being overlooked.