Energy stocks "a good value" despite lower oil: S&P Capital IQ
The drop in oil prices has taken its toll on energy stocks. But one strategist is optimistic on the sector’s prospects.
Crude prices (CLV15.NYM) are approaching $40 per barrel, down from nearly $100 a year ago. Lower oil prices helped to bring down the S&P 500’s energy sector, which is down 17% since the beginning of 2015. Energy (^GSPE) is the worst performer of the 10 major sectors in the S&P 500 (^GSPC).
Throughout the year, analysts lowered their expectations on energy stocks because of oil’s decline. But when second-quarter earnings came out, energy companies soundly beat Wall Street’s expectations. The sector’s earnings were on average 30% higher than analysts’ estimates. Five of the top 10 companies with the largest earnings surprises were in the energy business.
Company | Ticker | Sector | Q2 EPS Estimate | Q2 EPS Actual | % Difference |
Electronic Arts | Information Technology | $0.022 | $0.15 | 650% | |
Hudson City Bancorp | Financials | $0.005 | $0.07 | 600% | |
Apartment Investment & Management | Financials | $0.097 | $0.39 | 290% | |
Noble Energy | Energy | $0.074 | $0.26 | 271% | |
Pioneer Natural Resources | Energy | $0.294 | $0.10 | 233% | |
EOG Resources | Energy | $0.106 | $0.28 | 155% | |
Newfield Exploration | Energy | $0.193 | $0.46 | 142% | |
Prologis | Financials | $0.118 | $0.27 | 125% | |
Transocean | Energy | $0.514 | $1.11 | 118% | |
First Solar | Information Technology | $0.253 | $0.52 | 108% |
Source: S&P Capital IQ
“Simply, we didn’t expect them to earn as much,” said Erin Gibbs, equity chief investment office at S&P Investment Advisory Services. But crude prices went from $49 per barrel in early April to $59 per barrel by the end of June, making the situation slightly better for energy companies.
Nonetheless, Wall Street remains fairly negative on the energy and is forecasting a 65% decline in third-quarter earnings from the previous year and a 56% drop in earnings for 2015 compared to 2014.
Get the Latest Market Data and News with the Yahoo Finance App
“I think this is actually over-pessimistic,” said Gibbs, who is responsible for over $16 billion in assets under advisory. “Energy companies can actually do better even with oil prices dropping recently. We’ve seen already stabilization in gas prices and we can see a little more stabilization in oil… They have the potential of easily beating earnings and doing better than we expect.”
Looking out to 2016, Gibbs anticipates 23% growth in energy earnings. Yet on a relative basis, the sector isn’t cheap. It is trading at roughly 26 times its expected next 12-months’ earnings compared to a multiple of 17 times for the overall S&P 500.
But Gibbs remains positive on energy.
“Taking into account we expect earnings to grow so much, particularly in the second half of 2016, they look a little more reasonable when you start looking at two years out, three years out,” she said. “I know it seems a little pricey right at this moment but ultimately it’s still a good value at this point."
More from Yahoo Finance
Forget China, the Fed needs to raise rates now: Top economists
3 reasons why China had to devalue: Deutsche
Billions of dollars in new headaches ahead for old real estate deals