Constellation Energy [CEG: NYSE - $35.50] is the holding company for Baltimore Gas and Electric, the regulated supplier of those commodities to about 1.1 million electric customers and about 640,000 natural gas consumers. They also own the non-regulated Constellation Energy Commodities Group and Constellation NewEnergy.
It’s been a wild ride for CEG shareholders over the past five years as the merchant energy trading arm first made great profits and then nearly bankrupted the company from 2008’s huge energy price rise and fall. Liquidity needs skyrocketed due to the extreme volatility and CEG’s traders being on the wrong side of the markets. Constellation shares plunged from an early 2008 high of $108 to a panic low of $13 in the fall when the financial markets froze after the Lehman collapse.
You may remember that Berkshire Hathaway made an opportunistic, unsolicited bid to buy the company (at a very distressed-sale price) at that time. Liquidity was restored through a variety of means culminating with the sale of just under 50% of CEG’s nuclear facilities to Electricite de France. This represented a big gain for CEG and, after taxes, it generated about $2.3 billion in cash that was used to pay down $850 million in debt and to bolster the balance sheet.
While reported earnings were all over the map before non-recurring losses and gains the company’s 2009 annual report sorted out the numbers excluding special items and non-qualifying hedges. Here are the ‘smoothed out’ numbers from the latest annual report:
* includes a $4.456 billion gain on sale of nuclear assets
Here are the longer-term results as reported by Value Line (including the adjusted EPS):
* includes the $4.456 billion gain from the sales of nuclear assets
The trading portion of the business now has a much lower risk profile than it did early in the last decade. Energy deregulation should provide opportunities for CEG as it spreads across America. The current issue of Forbes notes that Constellation’s wholly owned subsidiary Constellation NewEnergy is a major player in helping businesses modulate their power use to minimize their energy costs. NewEnergy claims they currently work with 2/3 of all Fortune 500 companies through regional offices in every ‘open electricity’ market. Their operations include many politically favored areas such as wind power and other alternative energy sources. NewEnergy Online allows customers to use the web to view bills, check usage patterns and compare usage levels at different facilities at any time of the day 24/7. Over time, this unit should provide a real growth engine on the non-regulated side of CEG’s business.
CEG management stated that they expect 2010 EPS of $3.05 - $3.45. Standard and Poors now looks for $3.35 and $3.45 for 2010 and 2011 which is similar to the Zacks view for $3.37 and $3.53. Zacks notes that they have witnessed two upward revisions in earnings estimates (over the past 30 days) from the nine analysts covering the stock. At today’s quote of $35.50 the shares trade for about 10.6x this year’s and 10.2x next year’s estimates. Those are very low by historical measures.
The dividend of $0.24 quarterly provides a current yield of 2.7% that is well-covered at just a 29% payout ratio.
Book value jumped to $43.27 after booking the gain from the sale of the minority interest in CEG’s nuclear plants. Thus, CEG now trades for an 18% discount to B/V where traditionally it has traded at a significant premium to B/V.
What should be the P/E for a hybrid regulated/non-regulated utility holding company such as CEG? Value Line notes its prior 10-year median multiple was 15x. I’d guess that these shares can conservatively command at least 12.5x projected earnings. That would lead to a target price of about $42 over the next 12 months. That would be an 18.3% rise on top of the 2.7% yield for a total return projection of 21%.
Is that achievable? I think so. CEG shares actually traded as high as $44.90, $62.60, $70.20, $104.30, and $108 at its peaks in 2004-2005-2006-2007-2008 when earnings per share were not much different than they are today.
If the deregulation unfolds favorably the upside might be much greater.
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If you’re comfortable with selling options consider these trades as a way to participate with an even lower break-even price than today’s level:
Dr. Paul Price
www.BeatingBuffett.com
Disclosure: Author is long CEG shares and short CEG puts.
It’s been a wild ride for CEG shareholders over the past five years as the merchant energy trading arm first made great profits and then nearly bankrupted the company from 2008’s huge energy price rise and fall. Liquidity needs skyrocketed due to the extreme volatility and CEG’s traders being on the wrong side of the markets. Constellation shares plunged from an early 2008 high of $108 to a panic low of $13 in the fall when the financial markets froze after the Lehman collapse.
You may remember that Berkshire Hathaway made an opportunistic, unsolicited bid to buy the company (at a very distressed-sale price) at that time. Liquidity was restored through a variety of means culminating with the sale of just under 50% of CEG’s nuclear facilities to Electricite de France. This represented a big gain for CEG and, after taxes, it generated about $2.3 billion in cash that was used to pay down $850 million in debt and to bolster the balance sheet.
While reported earnings were all over the map before non-recurring losses and gains the company’s 2009 annual report sorted out the numbers excluding special items and non-qualifying hedges. Here are the ‘smoothed out’ numbers from the latest annual report:
Raw EPS Data | Adjusted EPS | |
2007 | $4.51 | $4.60 |
2008 | ($7.34) | $3.57 |
2009 | $22.19* | $3.36 |
* includes a $4.456 billion gain on sale of nuclear assets
Here are the longer-term results as reported by Value Line (including the adjusted EPS):
Year | Sales | C/F | EPS | Div. | B/V | Avg. P/E |
2002 | 28.53 | 5.50 | 2.29 | 0.96 | 23.43 | 12.1x |
2003 | 57.82 | 6.31 | 2.76 | 1.04 | 24.67 | 11.8x |
2004 | 71.17 | 6.89 | 3.19 | 1.14 | 26.81 | 12.4x |
2005 | 96.08 | 6.78 | 3.38 | 1.34 | 27.57 | 16.0x |
2006 | 106.83 | 6.81 | 3.76 | 1.51 | 25.53 | 15.6x |
2007 | 118.77 | 7.52 | 4.60 | 1.74 | 29.93 | 20.5x |
2008 | 99.53 | 3.36 | 3.57 | 1.91 | 15.98 | 16.8x |
2009 | 79.55 | 4.02 | 3.36 | 0.96 | 43.27* | 9.0x |
* includes the $4.456 billion gain from the sales of nuclear assets
The trading portion of the business now has a much lower risk profile than it did early in the last decade. Energy deregulation should provide opportunities for CEG as it spreads across America. The current issue of Forbes notes that Constellation’s wholly owned subsidiary Constellation NewEnergy is a major player in helping businesses modulate their power use to minimize their energy costs. NewEnergy claims they currently work with 2/3 of all Fortune 500 companies through regional offices in every ‘open electricity’ market. Their operations include many politically favored areas such as wind power and other alternative energy sources. NewEnergy Online allows customers to use the web to view bills, check usage patterns and compare usage levels at different facilities at any time of the day 24/7. Over time, this unit should provide a real growth engine on the non-regulated side of CEG’s business.
CEG management stated that they expect 2010 EPS of $3.05 - $3.45. Standard and Poors now looks for $3.35 and $3.45 for 2010 and 2011 which is similar to the Zacks view for $3.37 and $3.53. Zacks notes that they have witnessed two upward revisions in earnings estimates (over the past 30 days) from the nine analysts covering the stock. At today’s quote of $35.50 the shares trade for about 10.6x this year’s and 10.2x next year’s estimates. Those are very low by historical measures.
The dividend of $0.24 quarterly provides a current yield of 2.7% that is well-covered at just a 29% payout ratio.
Book value jumped to $43.27 after booking the gain from the sale of the minority interest in CEG’s nuclear plants. Thus, CEG now trades for an 18% discount to B/V where traditionally it has traded at a significant premium to B/V.
What should be the P/E for a hybrid regulated/non-regulated utility holding company such as CEG? Value Line notes its prior 10-year median multiple was 15x. I’d guess that these shares can conservatively command at least 12.5x projected earnings. That would lead to a target price of about $42 over the next 12 months. That would be an 18.3% rise on top of the 2.7% yield for a total return projection of 21%.
Is that achievable? I think so. CEG shares actually traded as high as $44.90, $62.60, $70.20, $104.30, and $108 at its peaks in 2004-2005-2006-2007-2008 when earnings per share were not much different than they are today.
If the deregulation unfolds favorably the upside might be much greater.
********************************************************************************
If you’re comfortable with selling options consider these trades as a way to participate with an even lower break-even price than today’s level:
Sell | Put Premium /sh. | Price ‘If Put’ | Margin of Safety* |
Jan. 2011 $35 Puts | $3.20 | $31.80 | 10.4% |
Jan. 2012 $35 Puts | $5.20 | $29.80 | 16.0% |
Jan. 2012 $40 Puts | $8.30 | $31.70 | 10.7% |
* % that break-even price is below today’s $35.50 quote | |||
Dr. Paul Price
www.BeatingBuffett.com
Disclosure: Author is long CEG shares and short CEG puts.
