Utilities | Stock Recommendation
03.09.2010
Nihar Shah
Michael Song
Recommendation
• Decrease weight in SIM portfolio by 73 bps
• Final: Underweight 151 bps
• Total weight of SIM: 200 bps
Introduction
• Utilities Sector
– Size: 1721.2B
– Industries
Industry
Market Cap
P/E
ROE %
Div. Yield %
Price to Book
Diversified Utilities
135.0B
11.5
13.00%
4.69%
1.84
Electric Utilities
301.6B
15.1
10.00%
3.95%
1.81
Foreign Utilities
1170.9B
86.0
1.60%
1.58%
1.98
Gas Utilities
104.3B
15.7
13.80%
3.99%
3.31
9.5B
0.0
-5.20%
3.47%
1.75
Water Utilities
Source: Yahoo Finance as of 2/23/10
S&P/SIM Weight
(.78)%
S&P/Sector Performance (YTD)
S&P/Sector Performance (YTD)
8.00%
6.00%
4.00%
Outperform
2.00%
0.00%
Underperform
-2.00%
-4.00%
S&P
Industrials
Financial
Cons. Disc. Cons. Stpl.
Energy
Healthcare
Materials
Tech
Utilities
Exelon Corp (EXC)
• Exelon is a diversified utility company
which operates through three subsidiaries:
Generation, PECO, and ComEd
• Generation consists of owned and contracted
electric generating facilities with 24,850 MW
of capacity, of which 17,009 MW (68.5%) is
nuclear
• ComEd delivers energy to retail customers in
northern Illinois
Exelon Corp (EXC)
Multiples Valuation:
Absolute
Valuation
High
Low
Median
Current
Target
Target
Multiple E,S,B/Share
Target
Price
P/Forward E
20.8
9.3
13.0
12.1
12.1
3.77
45.6
P/S
3.3
1.0
1.8
1.7
1.8
26.26
47.3
P/B
6.8
1.8
3.1
2.4
2.5
18.96
47.4
P/EBITDA
9.5
2.8
5.8
3.9
5.8
11.76
68.1
P/CF
13.6
4.5
8.2
5.6
7.5
8.05
60.4
Exelon Corp (EXC)
Year
Revenue
% Growth
2010E
17,664
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
18,548
5.0%
19,475
5.0%
20,449
5.0%
21,471
5.0%
22,545
5.0%
23,672
5.0%
24,856
5.0%
26,098
5.0%
27,403
5.0%
28,773
5.0%
Operating Income
Operating Margin
5,028
28.5%
5,343
28.8%
5,649
29.0%
5,930
29.0%
6,227
29.0%
6,538
29.0%
6,865
29.0%
7,208
29.0%
7,569
29.0%
7,947
29.0%
8,344
29.0%
Interest Income
Interest % of Sales
(768)
-4.4%
(807)
-4.4%
(847)
-4.4%
(890)
-4.4%
(934)
-4.4%
(981)
-4.4%
(1,030)
-4.4%
(1,081)
-4.4%
(1,135)
-4.4%
(1,192)
-4.4%
(1,252)
-4.4%
Taxes
Tax Rate
1,651
38.8%
1,758
38.8%
1,861
38.8%
1,953
38.8%
2,051
38.8%
2,153
38.8%
2,261
38.8%
2,374
38.8%
2,493
38.8%
2,618
38.8%
2,748
38.8%
Net Income
% Growth
2,609
2,778
6.5%
2,941
5.9%
3,087
5.0%
3,242
5.0%
3,404
5.0%
3,574
5.0%
3,753
5.0%
3,940
5.0%
4,137
5.0%
4,344
5.0%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Shares Outstanding
1,811
1,855
1,947
2,045
2,147
2,254
2,367
2,486
2,610
2,740
2,877
10.3%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
65
211
221
225
236
248
260
273
287
301
317
0.4%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
1.1%
3,356
3,431
3,505
3,579
3,650
3,720
3,788
3,853
3,915
3,973
4,028
19.0%
18.5%
18.0%
17.5%
17.0%
16.5%
16.0%
15.5%
15.0%
14.5%
14.0%
998
10,952
20,861
31,813
991
-0.7%
1,162
17.2%
1,329
14.4%
1,503
13.1%
1,690
12.5%
Current Price
$ 45.50
Implied equity value/share $ 48.06
Upside/(Downside) to DCF
5.6%
2,112
11.6%
2,348
11.2%
2,603
10.8%
2,877
10.5%
34%
Terminal
EV/EBIT
DA
66%
100%
Terminal
P/E
3.31%
662
1,893
12.0%
Terminal Discount Rate: 9.0%
Terminal FCF Growth: 3.0%
5.4
11.4
Terminal
Value
49,385
Free
Cash
Yield 5.83%
Exelon Corp (EXC)
• Valuation
TGR
TDR
Current Price: $45.50
Target Price: $48.06
Upside: 5.6%
Dividend Yield:
$2.10 / 4.6%
• $30.1 Billion
• Recommendation:
Sell 100%
•
•
•
•
Sensitivity Analysis:
2.00%
2.50%
3.00%
3.50%
4.00%
8.00%
51.67
54.96
58.92
63.75
69.78
8.50%
47.15
49.82
52.98
56.77
61.41
9.00%
43.29
45.49
48.06
51.09
54.73
9.50%
39.96
41.79
43.9
46.36
49.27
10.00%
37.07
38.6
40.36
42.38
44.74
Public Service Enterprise Group (PEG)
• PEG is a diversified utility company with operations
primarily in the Northeastern and Mid-Atlantic United
States
• 3 Primary Businesses (% of total revenue):
•
•
•
Power (74.7%) - Selling electricity, natural gas, capacity,
and emissions credits under contract or on spot market
PSE&G (20.4%) - Provides electric transmission and
electric and gas distribution to residential, commercial
and industrial customers in New Jersey. Currently
increasing level of renewable generation
Energy Holdings (4.5%) - Manages leveraged lease
investments and operates domestic generation projects.
Also pursuing solar and other renewable generation
projects.
PEG/S&P Performance (5 year)
Relative Multiple Valuation
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
P/EBITDA
High
Low
Median
Current
2.6
1.5
3.4
19.4
1.7
1.58
.12
.44
.3
.6
.2
.92
.95
.91
1.4
1.6
1.2
1.32
.81
.83
1.2
1.2
1.0
.94
Relative to
S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
P/EBITDA
High
Low
Median
Current
1.4
1.3
1.5
1.6
1.2
1.24
.31
.32
.3
.4
.3
.54
.66
.67
.8
.9
.7
.93
.57
.67
.8
1.1
.6
.59
Absolute Valuation
Absolute
Valuation
A.
High
Low
B.
C.
Media
n
Current
D.
E.
#Your
*Your
Target
Target
Multiple E, S, B,
etc/Sha
re
F.
G.
Your
Target
Price
(F x G)
H.
P/Forward E
19.0
6.8
11.5
9.9
11.5
3.16
36.34
P/S
2.0
.6
1.2
1.3
1.3
30.09
39.12
P/B
3.6
1.4
2.3
1.8
2.2
17.33
38.13
P/EBITDA
8.13
2.41
4.40
3.85
4.5
8.10
36.45
P/CF
12.9
4.3
7.1
6.2
7.0
5.03
35.23
Public Service Enterprise Group Inc. (PEG)
Analyst: Nihar Shah
3/6/2010
(Millions)
Year
2010E
Revenue
% Growth
Operating Income
Operating Margin
Interest Income
Interest % of Sales
Taxes
Tax Rate
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
2011E
2012E
15,717
3.0%
3,285
20.9%
(644)
-4.1%
1,103
41.8%
1,538
-4.0%
982
6.3%
116
0.7%
1,680
10.7%
16,346
4.0%
3,463
21.2%
(654)
-4.0%
1,173
41.8%
1,636
6.4%
981
6.0%
159
1.0%
1,645
10.1%
(83)
725
-977.1%
814
12.2%
6,085
13,307
19,392
-0.52%
31%
69%
100%
15,259
3,392
22.2%
(641)
-4.2%
1,149
41.8%
1,602
992
6.5%
737
4.8%
1,940
12.7%
Free Cash Flow
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Terminal Discount Rate =
9.0%
Terminal FCF Growth =
5.0%
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
5.9%
1,020
6.0%
170
1.0%
1,711
10.1%
17,680
4.0%
3,819
21.6%
(707)
-4.0%
1,299
41.8%
1,813
4.6%
1,061
6.0%
177
1.0%
1,779
10.1%
18,387
4.0%
3,990
21.7%
(735)
-4.0%
1,359
41.8%
1,896
4.6%
1,103
6.0%
184
1.0%
1,850
10.1%
19,122
4.0%
4,169
21.8%
(765)
-4.0%
1,421
41.8%
1,983
4.6%
1,147
6.0%
191
1.0%
1,924
10.1%
19,887
4.0%
4,355
21.9%
(795)
-4.0%
1,486
41.8%
2,074
4.6%
1,193
6.0%
199
1.0%
2,001
10.1%
20,683
4.0%
4,530
21.9%
(827)
-4.0%
1,546
41.8%
2,157
4.0%
1,241
6.0%
207
1.0%
2,081
10.1%
21,510
4.0%
4,711
21.9%
(860)
-4.0%
1,607
41.8%
2,243
4.0%
1,291
6.0%
215
1.0%
2,164
10.1%
22,370
4.0%
4,899
21.9%
(895)
-4.0%
1,672
41.8%
2,333
4.0%
1,342
6.0%
224
1.0%
2,251
10.1%
872
7.2%
918
5.2%
965
5.2%
1,015
5.2%
1,067
5.1%
1,110
4.0%
1,154
4.0%
1,200
4.0%
17,000
4.0%
3,655
21.5%
(680)
-4.0%
1,242
41.8%
1,733
Terminal Value
Free Cash Yield
31,503
3.81%
9.9
12.1
10.3
12.6
9.7
11.9
Terminal P/E
13.5
Current EV/EBITDA
Projected EV/EBITDA
5.3
6.1
5.5
6.3
5.2
6.0
Terminal EV/EBITDA
6.2
Shares Outstanding
507
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
31.20
38.25
22.6%
PEG
•
•
•
•
•
•
Valuation (Weighted): $37.27
.3 DCF + .3 P/FE + .1 P/B + .1 P/S +.1 P/CF + .1
TGR
P/EBITDA
4.00% 4.50% 5.00% 5.50%
Current Price: $31.2
8.00% 41.11
45.33
50.97
58.87
Upside: 19.5%
8.50% 36.49
39.65
43.7
49.11
9.00% 32.8
35.22
38.25
42.14
Yield: 4.4%
9.50% 29.78
31.68
34.01
36.91
$15.5 Billion
10.00% 27.26
28.79
30.61
32.84
DCF: Discount Rate = 9%,
Pgrowth = 5%
Recommendation:
Buy 200 BPS
TDR
•
6.00%
70.71
56.68
47.33
40.65
35.63
AEP
• Current Price: $34.21
• Valuation (Weighted): $36.17
– .3 DCF + .3 P/FE + .1 P/B + .1 P/S +.1 P/CF +
.1 P/EBITDA
• Upside: 7.1%
• Yield: 4.9%
Questions?
Old Slides
Utilities – Catalysts/Risks
• Catalysts
–
–
–
–
Rate Regulation Increase
Weather Patterns
Improvement in Economy
Green Policy (Nuclear/Water)
• Risks
–
–
–
–
Rate Regulation Neutral/Decrease
Inconsistent or over-demand
Commodity Prices
Green Policy (Electric/Diversified/Gas)
Largest Companies in (SPUT)
Company
Market Cap
Sales (in M)
EPS
5 Yr Growth
LT Growth
ROE
Yield
N/A
N/A
8.00%
ROE + Yield
5.00%
12.30%
4.60%
16.90%
SPUT
355.0 B
EXC
29.5 B
17.32 B
4.09
10.00%
0.00%
22.90%
4.70%
27.60%
SO
25.9 B
15.74 B
2.07
3.00%
4.00%
13.00%
5.40%
18.40%
NGG
24.7 B
24.13 B
3.85
2.00%
7.00%
25.20%
4.60%
32.90%
DUK
21.40 B
12.73 B
.83
-8.00%
4.00%
7.40%
5.80%
13.20%
FPL
19.40 B
15.65 B
3.97
12.00%
7.00%
13.60%
4.30%
17.90%
AEP
16.10 B
13.44 B
2.88
5.00%
4.00%
12.00%
4.90%
16.90%
FE
12.10 B
12.97 B
3.29
11.00%
3.00%
13.60%
5.50%
19.10%
EIX
11.00 B
12.54 B
2.59
10.00%
3.00%
11.30%
3.70%
15.00%
OKE
4.60 B
10.23 B
2.65
3.00%
10.00%
14.40%
4.00%
18.40%
Business Analysis
Electric
Diversified Foreign
Gas
Water
Gas Util
Sector
Mutli Util
Elec Util
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Price
Industry vs Sector Performance
450
400
350
300
250
200
150
100
50
0
Sector vs S&P Performance
Correlation: 80.93%
Outperform
Outperform
Economic Analysis
Economic Analysis
13,600
12.0
13,400
10.0
GDP
13,200
8.0
13,000
6.0
12,800
4.0
12,600
2.0
12,400
12,200
Jan-04
May-05
Oct-06
Real Gross Domestic Product
Feb-08
Jul-09
Unemployment Rate
0.0
Nov-10
Unemployment
Unemployment vs GDP
Economic Analysis
Change in GDP vs Sector Price
40
10.00
8.00
30
6.00
2.00
10
0.00
0
-2.00
% Change in Sector
% Change in GDP
20
4.00
-10
-4.00
-20
-6.00
-8.00
Aug-87
May-90
Jan-93
Apr-01
Jul-98
Oct-95
Real Gross Domestic Product
Jan-04
Oct-06
EXC.S
Jul-09
-30
Apr-12
Forecast: GDP will very slowly increase over the short term
Economic Analysis
Relative Strength of Utility Sector vs S&P 500
3.0
2.5
2.0
1.5
1.0
Aug-87
May-90
Jan-93
Oct-95
Jul-98
Apr-01
Jan-04
0.5
0.0
S&P 500
Rel Str
Oct-06
Jul-09
Apr-12
Economic Analysis
Forecast: Interest Rate will increase in the short term
Economic Analysis
Oil ETF Price (USO)
EXC.S vs OIL (USO)
120
100
80
60
40
R2 = 0.4733
20
0
100
120
140
160
180
200
Utility Sector Price (EXC.S)
220
240
Economic Analysis
Economic Analysis
Natural Gas ETF Price
(UNG)
EXC.S vs Natural Gas (UNG)
70
60
50
40
30
20
10
0
R2 = 0.7701
100
120
140
160
180
200
220
240
Utility Sector Price (EXC.S)
Forecast: Natural Gas Price will stay relatively constant in the short term
Economic Analysis
Coal EFT Price (KOL)
EXC.S vs Coal (KOL)
70
60
50
40
30
20
10
0
R2 = 0.7565
100
120
140
160
180
Utility Sector Price (EXC.S)
200
220
Economic Analysis
Forecast: Potential for long term growth
Regulation
•
State commissions are responsible for determining utilities’ proper rate bases and allowable operating expenses.
Individual states’ rulings often differ with regard to these determinations. They also differ in allowed accounting
treatments for depreciation accruals and investment tax credits. Although rulings are often presumed to be based
solely on the public interest, commissions actually seek to provide a balance between investor and consumer
interests.
Green Policy (Update)
•
On June 26, 2009, the House of Representatives passed, by a narrow 217–
205 margin, its version of a new energy bill, H.R. 2454. Included in the bill,
called the American Clean Energy and Security Act, 2005–2050, were
provisions for a cap-and-trade system that would incrementally reduce GHG
emissions, beginning with a cap on 2012 emissions that is 3% below 2005
levels. The bill, whose principal sponsor was Henry Waxman (D.–
California), also included a requirement that utilities get 15% of their
electricity from renewable energy sources and, through increasing their
energy efficiencies, reduce their electricity use 5% by 2020. Individual
states, however, would be allowed to vary these two percentages as long as
the total came to 20%.
Financial Analysis
Sector
Financial Analysis
Revenues (SPUT)
45
40
35
30
25
Margins
35%
30%
25%
20%
EBITDA
Net Profit
15%
ROE
10%
Net Profit
N/A
5%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Summary
Analysis
Conclusions
Business
Mature industry, cyclical in nature
Economic
Expect slow growth
Financial
Declining Revenue, stable profit margin
stable ROE, and declining Net Profit
Margin.
Negative
Sector seems to be trading at a slight
discount.
Slightly positive
Valuation
View
Neutral
Slightly
Negative
Overall: Slightly negative for short term
Recommendation
• Decrease weight in SIM portfolio by 72 bps
• Final: Underweight 150 bps
Questions