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On Monday, Bernstein analysts released an update on the "State of Utility Capex" series, which tracks U.S. electric utility spending trends and their impact on electrical equipment manufacturers and contractors. The first quarter (Q1) of the year showed a modest year-over-year capital expenditure (capex) growth of 1%, falling short of the consensus expectation of 5%. Despite this slow start, projections indicate a significant uptick in the second (Q2) and third (Q3) quarters, with capex expected to accelerate to 20% and 28% year-over-year growth, respectively.
Long-term capex forecasts for 2025 have been revised upwards by 600 basis points to a 15% year-over-year increase, while 2026 expectations remain stable with a 1% growth. In the first quarter, two utilities, Alliant and CenterPoint, adjusted their long-term plans upwards by a combined $1.6 billion, contributing to a marginal quarter-over-quarter improvement. Overall, long-term forecasts are 15% higher year-over-year as of Q1, which is about 100 basis points above last year’s rate.
The spending focus is shifting towards transmission and generation over distribution. For 2025, utilities are budgeting for a 61% increase in generation spend, a 31% rise in transmission, and a 10% growth in distribution. This shift has caught the attention of investors, as transmission spend is expected to increase from 20% of the total in 2024 to 21% in 2025.
Utilities are also adapting their strategies regarding data centers, transitioning from initial enthusiasm to addressing the realities of cost and ratepayer protection. New tariffs and creative deals are being discussed, with a clearer impact on utility rate bases expected to emerge in 2026 as new loads come online.
Bernstein maintains a positive outlook for companies like Quanta Services (NYSE:PWR), Hubbell (NYSE:HUBB), and Eaton (NYSE:ETN), which are positioned to benefit from the anticipated acceleration in capex. Eaton, with its market capitalization of $129.7 billion and robust revenue growth of 7% over the last twelve months, stands out as a prominent player in the Electrical Equipment industry. According to InvestingPro analysis, while the company shows strong financial health, it’s currently trading above its Fair Value, with multiple valuation metrics suggesting premium pricing. These companies are expected to capitalize on multi-year end market growth, especially in the data center sector, where equipment and labor demand remains high, and backlogs are healthy. Bernstein rates Eaton as Outperform with a price target of $355, Hubbell also as Outperform with a target of $446, and Quanta Services as Outperform with a target of $383. This outlook is supported by both short-term and long-term tailwinds in the electrification space. Notably, Eaton has maintained dividend payments for 55 consecutive years, with a current dividend yield of 1.26% and recent dividend growth of 10.64%. InvestingPro subscribers have access to 16 additional key insights about Eaton, including detailed valuation metrics and growth indicators through comprehensive Pro Research Reports, available for over 1,400 US stocks.
In other recent news, Eaton Corporation reported record first-quarter earnings, surpassing analyst expectations. The company achieved an adjusted earnings per share of $2.72, slightly above the consensus estimate of $2.70, marking a 13% increase year-over-year. Revenue also reached a quarterly record of $6.38 billion, exceeding the anticipated $6.26 billion. Eaton experienced strong organic sales growth of 9% during the quarter, with segment margins expanding to 23.9%. Looking ahead, Eaton has raised its full-year earnings guidance, expecting adjusted EPS between $11.80 and $12.20, which is above the previous analyst consensus of $12.01. Additionally, Eaton announced an $18.5 million expansion of its Orchard Park, New York, facility, aimed at meeting the rising demand for aerospace mission systems. This expansion will add 50,000 square feet to the site and create 77 new manufacturing jobs. The investment reflects Eaton’s ongoing commitment to supporting its aerospace customers and enhancing local economic growth.
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