Bank of America recently spotlighted California utility stocks as investments worth reconsidering, amid the state’s efforts to restore investor confidence following a tumultuous period marked by devastating wildfires. California, well-known for its favorable climate and rich natural resources, has nonetheless faced challenges with increasing wildfire occurrences—thirteen of the state’s twenty largest wildfires have happened in the last decade alone. The catastrophic wildfire seasons of 2017 to 2019 were particularly hard-hitting, leading to widespread electric outages as utility companies, grappling with operational failures, proactively cut power to prevent fires.
Returning investor interest in California’s utility sector is now on the rise, thanks to recent legislative measures like AB 1054, which established the California Wildfire Fund. This initiative aims to mitigate the financial risks associated with wildfires and is part of broader efforts to enhance the state’s wildfire defenses. This resurgence has captured the attention of analysts, including Bank of America’s Ross Fowler, who believes that the combination of improved safety protocols and robust regulatory frameworks is creating a fertile environment for investment.
In identifying potential winners in this space, Fowler has put a spotlight on two major California utility companies positioned to flourish in the evolving energy landscape: PG&E (Pacific Gas and Electric) and Sempra Energy.
PG&E: A Rebound Story
Pacific Gas and Electric, a historic investor-owned utility founded in 1905, has been making strides to recover from its past liabilities associated with wildfire incidents. After a challenging bankruptcy period, PG&E is now on a path characterized by growth, reporting a revenue increase to $24.4 billion in 2023—a 12% rise from the previous year. With operations encompassing both electricity and natural gas services across Northern and Central California, PG&E is also committed to sustainable energy solutions, including hydroelectric power and hydrogen fuel initiatives.
In the second quarter of 2024, PG&E generated $5.99 billion in total revenue, benefiting from a substantial year-over-year growth of over 13%. Analysts like Fowler are optimistic about PG&E’s recent operational changes and management’s effectiveness in navigating post-bankruptcy challenges. He has expressed a Buy recommendation for the stock, with a target price of $24, indicating a potential upside of approximately 21% within the next year.
Sempra Energy: Diversifying Beyond California
On the other hand, Sempra Energy serves as a dynamic player in both the California and Texas energy markets, providing electricity and natural gas to millions of customers across the southwestern United States and Mexico. Notably, Sempra has launched various initiatives aimed at combatting climate change, including the construction of the Wildfire and Climate Resilience Center in California.
While Sempra reported $3.01 billion in revenue during the second quarter of 2024, that figure represented a nearly 10% decline year-over-year, missing analyst expectations. Despite this, Fowler remains bullish on Sempra, emphasizing the company’s robust position within regulated utilities and its potential for growth driven by planned capital investments. With a price target set at $94, Fowler forecasts an upside of over 15% for Sempra stocks in the coming year.
Concluding Thoughts
Both PG&E and Sempra Energy illustrate the resilience and potential of California’s utility sector, reflecting broader trends of recovery and innovation in a state striving to balance its abundant natural beauty with the realities of climate change. With ongoing investments and regulatory support, these companies could be on the verge of a significant turnaround, inspiring investor confidence once again.
Investors looking to stake their claim in the utility sector might find these stocks compelling as California navigates its complex energy future. Keeping an eye on these developments could yield fruitful opportunities for those seeking to invest in a recovering and evolving industry.