It seems daily that a new economic report misses estimates and pundits blame the historically cold winter. First, it was December’s jobs report and housing data then it was auto sales. On Thursday, the market shrugged off weak retail sales with the excuse that the weather-related miss was only temporary.
Temporary or not, the weather effect will come through in next quarter’s earnings and investors could do well in these sectors and companies that will benefit.
Oh the weather outside is frightful
Few have been safe from the Polar Vortex or whatever they are now calling the calamity that has dropped historic amounts of snowfall and brought record low temps to most of the country. Against rosy expectations for the year, retail sales dropped 0.4% in January and December sales were revised lower. Weakness in auto sales and across manufacturing has been blamed on the weather over the last two months and I am wondering if I will ever feel warm again.
Not all companies have been hit by the cold. Some have thrived with utilities adding the lone bright spot in industrial production and natural gas prices soaring. Colder weather also means snow blowers, rock salt and shovels for the home improvement retailers.
Natural Gas and Utility Production
The Energy Information Administration released its natural gas report last Thursday to show that stockpiles fell 237 billion cubic feet in the week ending February 7th and are now 27% below the five-year average. The EIA estimates that half of U.S. households use natural gas as their primary heating fuel. The drawdown and cold temps have brought natural gas prices back from decade-lows on the surge in production.
Northeast Utilities (NU) serves Connecticut, Massachusetts and New Hampshire through electricity and natural gas services. Shares are up 7.3% since October and almost 9% over the last year. Wholesale prices for electricity in New England have jumped 10% recently as capacity fails to keep up with demand and the winter will boost natural gas business. The stock trades a little higher than peers at 18.0 times trailing earnings but pays a 3.6% dividend yield and should see strong growth when it reports first quarter numbers.
Coal producers also have a dog in the race at higher natural gas prices. The 50% jump in natural gas prices over the last year is squeezing profits at gas-burning utility plants and reversing coal’s market share losses seen over the last few years. Peabody Energy (BTU) is still within 14.6% of its 52-week low as the natural gas rebound has yet to show through the company’s profits. Peabody is also a best of breed within the industry with its assets in the Powder River Basin and the Illinois Basin, both significantly cheaper production zones than Appalachian coal. The company blew by estimates for a $0.10 per share loss last quarter and could surprise again in April. Shares are down 4.8% since October and almost 34% over the last year. The stock seems pricey on 50 times trailing earnings but is the most likely to rebound when coal prices turn higher.
Shovels and salt, as long as the weather breaks for spring
Home Depot (HD) regularly beats earnings expectations and may be one of the few retailers to benefit from the cold when it reports fourth quarter numbers on the 25th of February. Expectations are for $0.72 per share, a gain of 7.4% on the same quarter last year against 5.8% revenue growth. Shares are up 1.3% since October and 14.7% over the last year. The shares are relatively expensive at 21 times trailing earnings but could still get a boost as investors rush to the few companies benefitting from the winter wonderland. Even at these prices, the company returns 2% in the form of a dividend payment and is well-positioned for the rebound in housing should the weather eventually warm or to sell more cold-weather gear if it doesn’t.
I wanted to add a clothing retailer to the list but the companies focused on cold-weather clothes don’t pay much of a dividend and those with a strong dividend do not have much of a line in winter gear. Still, there are plenty of opportunities in dividend stocks that will benefit from a winter chill that will be remembered for years to come.