In this article, let's take a look at Exelon Corp. (EXC, Financial), a $29.15 billion market cap company, which is a utility services holding company that is engaged in the energy generation business in the United States.
The Industry
The electric power generation industry includes more than 2,200 power generating plants with combined revenue of $80 billion. Industry peers are Duke Energy (DUK, Financial), Exelon (EXC, Financial), American Electric Power (AEP, Financial) and Consolidated Edison (ED, Financial).
Past and Future Results
The company had good results in the past, but they were affected by power prices that have crashed since 2008 levels. The consequences were a drop in returns, a reduction in dividends in 2013, as well as some acquisitions with the intention of having other point of attention, like the proposed acquisition of Pepco in April 2014. We can think that the firm´s distribution utilities will contribute more than half of consolidated earnings by 2016.
Concentration Risk
The company is positioned to Eastern and Midwestern U.S. power prices, which constitutes a risk of concentration, because they drive about half of earnings. This situation had little change even with the increased earnings diversification caused by the acquisition of Constellation in 2012.
Dividend Policy
Exelon has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 3.6%, which is good to protect the purchasing power.
Revenues, Margins and Profitability
Looking at profitability, revenue declined by 1.91% but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.60 vs $0.57). During the past fiscal year, the company increased its bottom line. It earned $2.00 versus $1.40 in the previous year. This year, Wall Street expects an improvement in earnings ($2.38 versus $2.00).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| EXC | Exelon Corp | 8.15 |
| DUK | Duke Energy Corporation | 5.4 |
| KEP | Korea Electric Power Corp | 4.56 |
| AEP | American Electric Power Co Inc | 10.76 |
| XEL | Xcel Energy Inc | 10.10 |
| EIX | Edison International | 16.28 |
| Ă‚ | Industry Median | 8.48 |
The company has a current ROE of 8.15% which is lower than the industry median and the ones exhibited by American Electric Power and Xcel Energy (XEL, Financial), but higher than Duke Energy and Korea Electric Power (KEP, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Edison International (EIX, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 15.7x, trading at a discount compared to an average of 19.7x for the industry. To use another metric, its price-to-book ratio of 1.3x indicates a discount versus the industry average of 1.52x while the price-to-sales ratio of 1.1x is below the industry average of 1.54x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final Comment
The company benefits from rising coal and natural gas prices which are probable scenarios that it could face. As outlined in the article, the Constellation acquisition in 2012 could lead the business in case gas and power prices remain low. Further, the PE relative valuation make me feel bullish on this stock.
Hedge fund guru Arnold Van Den Berg (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
