10 Utility Stocks With Upside

NEW YORK (TheStreet) -- The S&P 500 Index has gained 4.9% so far in 2011, while the Dow Jones Utilities Average (XME) advanced 2.2%. Overall, utility stocks are less volatile because of stable cash flows and provide limited upside, or downside, in comparison to other sectors.

For instance, upsides for industry majors such as Southern Company ( SO), Exelon ( EXC), Dominion Resources ( D), Duke Energy ( DUK), NextEra Energy ( NEE), PG&E ( PCG), American Electric Power ( AEP) and Spectra Energy ( SE) are expected in the range of -3% to 9% over the next 12 months, according to consensus estimates of analysts surveyed by Bloomberg.

Nonetheless, the following 10 utility stocks with an upside range of 14%-65% will likely outperform their peers, according to analysts' estimates of 12-month target prices. Most of these stocks have superior buy and hold ratings, compared to peers. In addition to growth potential, these stocks offer high dividend yields relative to several other sectors.

However, rising energy costs will likely moderate dividends of electric utility companies. To sustain profits and for higher dividend yields, utility companies may seek mergers and acquisitions. Last month, Duke Energy announced to buy Progress Energy ( PGN) for $13.7 billion in stock.

10. Middlesex Water ( MSEX) treats, stores and distributes water for residential, commercial, industrial and fire control purposes and is under contract of municipal and private clients in New Jersey, Delaware and Pennsylvania.

Analysts polled by Bloomberg expect the company to report earnings of 15 cents per share during 2010 fourth quarter, compared to earnings of 12 cents per share in the year-ago and quarter-ago periods. The company is likely to report earnings per share of 94 cents for 2010 and 95 cents for 2011, compared to earnings of 72 cents per share for 2009.

The stock offers a dividend yield of 4.3%, higher than its larger competitors. American Water Works ( AWK), Aqua America ( WTR) and SJW ( SJW) have dividend yields of 3.7%, 2.9% and 2.8%, respectively.

Of the three analysts covering the stock, one recommends buying and two rate holding. The average price target of analysts surveyed by Bloomberg is $20.5, 14% higher than the stock's current level.

9. AES Corporation ( AES) acquires, develops, owns, and operates power generation plants and distribution systems in several countries.

For 2010 fourth quarter, analysts polled by Bloomberg expect the company to report earnings of 26 cents per share, up from 8 cents and 5 cents reported for the year-ago and quarter-ago periods, respectively. Analysts expect AES to report earnings per share of 85 cents for 2010, $1.18 for 2011 and $1.61 for 2012.

The stock's return-on-equity during the past 12 months was 15.8%. In comparison, Duke Energy ( DUK), NRG Energy ( NRG), Enersis ( ENI), Dynegy ( DYN), Constellation Energy ( CEG) and Edenor ( EDN) had ROEs of 5.1%, 13.2%, 13.4%, -33.6%, -11.9% and 4.2%, respectively.

Of the seven analysts covering the stock, five recommend buying and two rate holding. On average, analysts polled by Bloomberg expect the stock to rise 14% over the next 12 months.

8. California Water Service Group ( CWT) is a holding company of several water utilities, providing regulated and non-regulated water services in California, New Mexico and Washington.

Analysts polled by Bloomberg expect the company to report earnings of 33 cents per share during 2010 fourth quarter, compared to earnings of 31 cents per share in the year-ago period. The company is likely to report earnings per share of $1.90 for 2010 and $2.16 for 2011.

The stock will likely provide an upside of 14% over the next 12 months with a consensus target price of $41.3, according to analysts polled by Bloomberg. On the other hand, Aqua America, American Water Works, and Artesian Resources ( ARTNA) are expected to return around -1%, 7% and 9%, respectively.

Of the seven analysts covering the stock, two recommend buying and five suggest holding.

7. York Water ( YORW) is engaged in impounding, purifying, and distributing water in York Country and Adams County in Pennsylvania.

Analysts polled by Bloomberg expect the company to report earnings of 17 cents per share during 2010 fourth quarter, compared to 16 cents per share in the year-ago period. York Water is likely to report earnings per share of 71 cents for 2010 and 76 cents for 2011, up from 64 cents reported for 2009.

The stock surged around 31% over the past one year, surpassing competitors. American Water Works, Aqua America and SJW Corp. returned around 6.0%, 4.1% and -8.2% during the same period.

Of the four analysts covering the stock, one recommends buying and three suggest holding. Analysts polled by Bloomberg expect the stock to rise an average 17% over the next 12 months.

6. American States Water ( AWR), a holding company, purchases, distributes and sells water.

Analysts polled by Bloomberg expect the company to report earnings of 46 cents per share for 2010 fourth quarter, compared to 18 cents and 30 cents per share reported for the year-ago and quarter-ago periods, respectively. For the full year, analysts foresee the company reporting earnings per share of $1.89 for 2010, $2.17 for 2011 and $2.30 for 2012, in comparison to earnings of $1.62 per share reported for 2009.

At $33.7, the stock is trading at a lower price-to-earnings multiple of 17.7, compared to its peers. Aqua America, Artesian Resources, SJW, and Pennichuck ( PNNW) are trading at PE multiples of 25.8, 18.4, 24.8 and 33.6, respectively. In addition, American States Water's EV-to-EBITDA ratio of 7.8 is below that of its competitors.

Of the five analysts covering the stock, one recommends buying, three rate holding and one suggests selling. The stock's average price target, based on analysts surveyed by Bloomberg, is $39.5, about 17% higher than the current level.

5. Covanta Holding ( CVA) has diverse operations such as waste disposal, energy services and specialty insurance.

The company is expected to report earnings of 17 cents per share for 2010 fourth quarter, compared to earnings of 13 cents per share in the quarter-ago period, according to analysts polled by Bloomberg. The company is likely to report earnings per share of 50 cents for 2010, 66 cents for 2011 and 75 cents for 2012.

The stock's dividend yield of 9.5% surpasses that of its peers. Exelon, Dominion Resources, Public Service Enterprise Group ( PEG) and Ormat Technologies ( ORA) have dividend yields of 5.1%, 4.1%, 4.1% and 1.0%, respectively.

Of the 12 analysts covering the stock, 7 recommend buying, 2 rate holding and 3 suggest selling. The stock's average price target is $20.6, 17% above current level, based on analysts surveyed by Bloomberg.

4. Connecticut Water Service ( CTWS), operating through its subsidiary Connecticut Water Company, supplies water to residential, commercial, industrial, and municipal customers in Connecticut.

Analysts polled by Bloomberg expect the company to report earnings of 18 cents per share for 2010 fourth quarter, as opposed to earnings of 12 cents reported in the year-ago period. For the full year, analysts expect the company to report earnings per share of $1.20 for 2010, $1.20 for 2011, compared to earnings of $1.19 per share for 2009.

Of the two analysts covering the stock, one recommends buying and one suggests holding. On average, analysts polled by Bloomberg expect the stock to gain 20% over the next 12 months. The stock has a dividend yield of 3.8%.

3. GenOn Energy ( GEN) generates and wholesales electricity to investor-owned utilities, municipalities and cooperatives.

Analysts polled by Bloomberg expect the company to report loss of 5 cents per share for 2010 fourth quarter, compared to a loss of 71 cents per share in the year-ago period. For the full year, analysts foresee the company reporting earnings per share of 66 cents for 2010, a significant turnaround from a loss of $1.36 per share reported for 2009.

The stock has a 21% upside over the next 12 months with a consensus target price of $5.1, according to analysts polled by Bloomberg, whereas ALLETE ( ALE), ITC Holdings ( ITC), Integrys Energy Group ( TEG), Calpine ( CPN), and CenterPoint Energy ( CNP) are likely to return around 4%, 10%, -5%, 9% and 5%, respectively.

Of the 18 analysts covering the stock, 7 recommend buying and 11 suggest holding.

2. China Hydroelectric ( CHC) consolidates, operates and develops hydropower plants in China.

The stock has a 35% upside over the next 12 months with a consensus target price of $10.0, according to analysts polled by Bloomberg, whereas Korea Electric Power ( KEP), Empresa Nacional de Electricidad ( EOC), Huaneng Power International ( TEG) and TransAlta ( TAC) have upsides of 16%, 24%, 25% and 2%, respectively.

All four analysts covering the stock recommend buying.

1. U.S. Geothermal ( HTM) develops renewable energy and is engaged in the acquisition, development and utilization of geothermal resources in Idaho and Nevada.

Analysts polled by Bloomberg expect the company to report a loss of 1 cent per share for 2010 fourth quarter, compared to a loss of 2 cents per share in the quarter-ago period. Analysts foresee the company reporting loss per share of 9 cents for 2010 and 7 cents for 2011. Maintaining a buy rating, analysts at Jacob Securities forecast the company to break even in 2012 on cash flow generation from 11MW San Emidio Phase I, 26 MW Neal Hot Springs and 26 MW San Emidio Phase II projects.

The stock has an upside of 65% over the next 12 months with a consensus target price of $1.9, according to analysts surveyed by Bloomberg. On the other hand, Alliant Energy ( LNT), NV Energy ( NVE) and IDACORP ( IDA) have upsides of 5%, 10% and 3%, respectively.

All six analysts covering the stock recommend buying.

>To see these stocks in action, visit the 10 Utility Stocks With Upside portfolio on Stockpickr.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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