With shares in National Grid (LSE: NG) (NYSE: NGG.US) having risen by 17% in 2014, it’s clearly been a great year for investors in the company. Furthermore, with recent results having been upbeat and showing that the company remains on-track to deliver on its full-year guidance, it seems as though the electricity transmission company could be enjoying something of a purple patch.
Meanwhile, 2014 has been rather mixed for sector peers, SSE (LSE: SSE) and Centrica (LSE:CNA), with them both lagging National Grid during the year. While SSE’s shares have risen by a very impressive 13%, Centrica is down 13% mainly as a result of uncertainty surrounding its management team and disappointing near-term forecasts.
Furthermore, both stocks could continue their underperformance of National Grid in 2015. Here’s why.
Political Risk
While the UK economy is undoubtedly improving, with it now being the fastest growing economy in the developed world, many people in the country are not feeling any richer. That’s because wage growth remains stubbornly low and behind inflation; a situation that has been present since the start of the credit crunch. This means that, in real terms, people in the UK are getting poorer, not richer, and are seeing their disposable income decline.
In response, the Labour party has decided to make energy price freezes a flagship policy, with a new regulator planned should they win the election in 2015. This would clearly be bad news for SSE and Centrica, since it would mean a lack of control over their pricing and a bottom line that is highly uncertain due to fluctuations in the cost of production and supply.
Even though political polls do not necessarily show a Labour majority at present, as the election gets closer sentiment in SSE and Centrica is likely to be pegged back somewhat. This doesn’t mean that the two companies’ share prices will necessarily decline by a vast amount, but they could be subject to weak investor demand due to the relatively high degree of uncertainty surrounding their future operations and, more importantly, future profitability.
A Different Beast
That’s where National Grid has a major advantage over SSE and Centrica. It suffers from far less political risk than its two peers, due to it being involved in the transmission of, rather than direct supply of, electricity. This means that sentiment is unlikely to be hit as hard for National Grid as it is for SSE and Centrica.
Furthermore, with operations in the US, National Grid is arguably better geographically diversified than SSE and Centrica. This could help it to provide greater stability if political risk does increase in the UK in 2015 and beyond.
Looking Ahead
With shares in National Grid trading on a price to earnings (P/E) ratio of 16.7, they trade at a substantial premium to those of SSE and Centrica, which have P/E ratios of 13.1 and 14.4 respectively. However, as a result of the far lower political risk of National Grid, which could become highly relevant in 2015, I think it could outperform its two peers next year.
