Xcel Energy Inc. (XEL - Get Rating) is a leading electricity company that operates through Regulated Electric Utility, Regulated Natural Gas Utility, and All Other segments. The utility holding company’s ambitious plans to add 560 miles of new lines to deliver renewable energy, and its focus on carbon-free electricity, have helped its stock advance 6.9% year-to-date.

Meanwhile, the Utilities Select Sector SPDR (XLU) has a history of becoming volatile during summer, according to sector performance data collected by CXO Advisory Group. XLU has gained only 15.5% over the past year, compared to the SPDR S&P 500 ETF Trust’s (SPY) 41.6% returns over the same period. 

So, as the sector continues to underperform, XEL stock could be a risky investment for now. Furthermore, the company’s unimpressive financials and low profitability could hinder the stock’s ability to advance. 

Here is what we think could influence XEL’s performance in the near term:

Industry Challenges

The COVID-19 pandemic helped underscore the urgency of the power and utilities industry transition to clean energy and more players plan to similarly switch in an economy that is rapidly moving toward a sustainable energy-based future. However, the industry is facing a host of  risks.

Electricity companies that have not prioritized modernizing their finance functions could face operational difficulties with continued changes in consumer priorities amid the pandemic. This could undermine these companies’ profitability and long-term growth prospects. Also,  the pandemic-induced reduction in commercial and industrial customer power usage, coupled with increasing debt during sustained shutoff  periods, could continue to pose risks to utility companies like XEL.

Weak Financials and Profitability

Although XEL’s total operating revenues have increased 26% year-over-year to $3.54 billion in the first quarter, ended March 31, its total operating expenses rose 28.7% from its  year-ago value to $3.03 billion. The  company reported a $0.06 loss per share under   Xcel Energy Inc. and its Other segment. Also, XEL’s O&M expenses increased $5 million, or 0.9%, for the first quarter of 2021. This increase was attributable primarily  to expenses associated with new wind farms, software and infrastructure costs.

The company’s 41.2% trailing-12-month gross profit margin is 5.5% lower than the 43.6% industry average. Also, its trailing-12-month levered free cash flow margin came in at negative 16.1%. And its  EBIT margin and ROTC of 17.6% and 3.7%, respectively, are 17.9% and 9.8% lower than their  industry averages.

Consensus Rating and Price Target Indicate Potential Downside

Of the 13 Wall Street analysts that rated the stock, only two rated it Buy. The $68.15 consensus price target indicates a 4.3% potential downside. The consensus price targets range from a low of $60 to a high of $74.

POWR Ratings Reflect Bleak Prospects

XEL has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates stocks by various components. XEL has a D grade for Value and Quality. The stock’s 18.88x trailing-12-month Price/Cash flow, which is 62.7% higher than the 11.61x industry average, justifies its Value grade. Also, its poor profitability is in sync with its Quality grade.

It has a C grade for Growth. This reflects the company’s inadequate growth prospects.

In addition to the grades we’ve highlighted, one can check out additional XEL ratings for Sentiment, Stability and Momentum here. Of the 57 stocks in the F-rated Utilities – Domestic industry, XEL is ranked #47.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

XEL’s increasing shift toward clean energy has garnered significant investor attention. However, the utility sector related headwinds could cause the stock  to remain volatile during the summer. Furthermore, XEL lacks fundamental and financial strength, and thus could be a speculative bet. Therefore, we think it is best avoided now

XEL shares were unchanged in premarket trading Wednesday. Year-to-date, XEL has gained 7.65%, versus a 12.56% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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