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Weekly Wrap: Utilities Still Have Opportunity

Fri, 31 Mar 2017

Trump's review of the Clean Power Plan shouldn't alter the long-term move toward natural gas and renewables. Plus, active management shakeup at BlackRock, and Vertex soars after trial.


Video Transcript

Jeremy Glaser: Will utilities be hurt by the roll back of clean energy rules? BlackRock shakes up its active equity operations, and Vertex still looks cheap. This time in the Morningstar Weekly Wrap.

President Trump signed an order this week to have the EPA review the Obama-era Clean Power Plan. Our utility analyst, Travis Miller, doesn't see this having a massive impact on the utility industry.

Travis Miller: This executive order that President Donald Trump signed on Tuesday to review the Clean Power Plan probably isn't going to make a whole lot of difference for carbon emissions and the coal industry in the U.S. We think coal right now is being hurt by renewable energy and natural gas. Gas prices are so low that it's one of the most economic ways to generate electricity. Renewable energy in some areas also is a low-cost way to generate electricity in the U.S. What we think is going to happen is carbon emissions will continue to come down, and utilities are going to benefit from all the growth opportunities in natural gas generation and renewable energy over the next decade.

Glaser: BlackRock announced this week it's making some big changes to its active equity products, emphasizing quantitative strategies. Morningstar's Gregg Warren thinks this grand experiment is unlikely to move the needle for the firm.

Gregg Warren: BlackRock's announcement didn't surprise us too much. It represents about 11% of their portfolio overall on the active side. But it did lead to headlines about robots taking over portfolio management and equity analysis, which we think is a bit of a stretch at this point. BlackRock struggled to improve the performance and flows for this business. Ever since 2012, they did a big overhaul of the business then. So this is really sort of, in our opinion, a grand experiment on their part to see if they can figure out a way to improve, at least performance on these pieces of business, accept a lower fee on the overall business, which is basically where the industry is going anyway because active equities are going to be facing fee pressure as passive continues to grow. We continue to believe that the true growth and the true story for BlackRock is their passive business, the iShares business overall.

Glaser: Shares of Vertex soared after positive trial results for a new drug. Analyst Kelsey Tsai thinks there could be more upside from current levels.

Kelsey Tsai: This narrow-moat company has an entrenched position in the cystic fibrosis space, with the only disease-modifying drugs on the market and a robust pipeline. However, weaker than expected uptake of Vertex's drug, Orkambi, has tempered investors enthusiasm over the past year, due to the therapy's troubling side effect profile. Favorable trial results and likely FDA approval the next generation therapy--which is Tezacaftor in combination with Ivacaftor--does two key things. First, it de-risks Vertex's cystic fibrosis franchise. Ivacaftor in combination with Tezacaftor looks like it has better efficacy or if not equal efficacy to Orkambi, without the debilitating side effect profile. And second, it sets a foundation for the company's triple combination therapy in the most difficult to treat patient population, which we believe is currently underserved and presents the next largest opportunity for Vertex. We believe Vertex still has a healthy 20% upside.

Glaser: In case you missed on Morningstar.com this week, our equity analysts provided their outlook for the stock market in our Quarter End Insights Special Report.

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