From: capskb@alliant.backbone.uoknor.edu (Keith Brewster)
Subject: Re: Undervalued Utilities
Organization: University of Oklahoma, Norman, OK
Date: Tue, 28 Jul 1992 05:24:36 GMT

In article <seR6ntO00awCQquEZ1@andrew.cmu.edu> dd3e+@andrew.cmu.edu (Danny R Dalal) writes:
>	I think that over the next year utilities will do very well (because of 
>increased earnings).  I'd like to know if anyone follows the utilities
>sector and/or has any comments about it.  Specifically, I would like to
>load up on
>some undervalued shares now and wait on it.  What do you think? What do
>you recommend?

The argument is that utilities should do well in a low interest rate 
environment because they generally have a lot of debt to pay interest
on.  Also, they usually have a decent dividend so they may attract
money from the rate-shocked CD holders.

Its hard to tell how much of all that is _already factored into the
price_ (a key thing people tend to forget).

Beyond that argument you have to further break the utilities
into sectors, roughly: phones, electric, gas and water.  By category
my simple-minded assessment of how increased earnings might come 
about other than interest reduction due to refinancing:

Phones:  rate increases  (not likely politically with recession on
                          peoples minds -- you can argue about the reality).
         usage increase  recovery produces higher phone activity,
                         particulary in business and long distance
         cellular increase   could help some companies, but I think most
                             people have had higher expections that reality

Electric: rate increases  (see above)
         usage increase  more industrial use with recovery (if any)
         fuel price decrease  not likely if there is a recovery, some
                              chance of this if mid-east situation calms (ha)
                              not sure what moves coal prices
         repeal of clean air act    ha

Gas:     rate increases   not likely at the consumer sales point, but I
                          understand gas pipeline rates are being deregulated
                          somewhat (of course that could cause price wars)
         usage increase   some economy driven, but mostly weather.  Last
                          winter was very warm, so a return to normalcy this
                          winter could help those co's who have slimmed down
                          as a result of low sales last year.  El Nino is
                          waning, but still could be some lingering Mt Pinatubo
                          effects (small cooling), and global warming????
                          Also clean air act could lead to greater use of 
                          natural gas a motor fuel.
         raw materials increase  For those that supply fuel. The price of gas
                          in the futures market has been rising since March
                          at a time when it should have been falling.

 Water: rate increase     not likely
        cheaper water source   not a chance
        lower purification costs   ha

 All in all, I lean toward the gas stocks. They don't look so cheap on a
 P/E basis due to very low sales this past year, but have some hope for a
 rebound in the near future.  I've tried testing the waters with Arkla (ALG);
 they can benefit from the rising gas prices (if prices hold, otherwise
 they could be in for more tough times). Risk is the stock price has already
 come up some from their low and another warm winter would really hurt.

 kb
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