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Utilities stage a revolution
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October 23, 1997: 12:51 p.m. ET
Lower interest rates, restructuring should generate higher share prices
From Correspondent Bill Tucker
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NEW YORK (CNNfn) - There's a revolution under way in the utility industry, but you wouldn't know it based on stock performance.
The Dow utilities have hardly been electrifying -- they are up less than 3 percent on the year. Still, that increase is enough to flirt with record highs, and analysts say a big change in utility companies is under way.
"This industry is completely restructuring. I mean, the way business has been done for the last 75 years is completely changing, not just changing a little bit, and you will probably end up with two completely different industries when all is said and done," says Dan Scotto, a utilities analyst with Bear Stearns.
Analysts see the business evolving into two distinct segments -- power generation and power servicing. This restructuring was brought on by deregulation, which many analysts believe will take five years to complete.
If the restructuring play is too long-term, there are other more fundamental reasons to buy the stocks.
"Utilities are defensive stocks in the sense that they usually perform relatively better than the market when the market turns downward. They also perform relatively better during periods of economic recession. Therefore, when the stock market is worried about economic slowdowns, or just worried about a large market correction, they look to utility stocks as a safe place to be," says Barry Abramson, a utilities analyst for PaineWebber.
Even if utilities aren't a part of everyone's portfolio, there's reason to take some comfort in their rally. Utilities are interest rate sensitive stocks, meaning those bidding up the stocks are betting interest rates won't be going higher.
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