Exelon Corp. (EXC) has a large nuclear generation portfolio which makes it a low cost power producer. The company is well-positioned for margin expansion if power prices recover in the future. Also, EXC has attractive forward P/E of 13.5x and other valuations (shown below) as compared to its competitors. Based on my price target of $36.7 (calculations shown below), the stock offers investors 17% upside potential. Moreover, EXC offers a decent dividend yield of 4%, and with the recent dividend cut (earlier this year), the company is better positioned to invest in growth opportunities available and maintain its investment grade credit rating. Therefore, I recommend a 'buy' rating on the stock.
For the first quarter of 2013, EXC posted operating earnings per share of $0.70, beating the analysts' consensus by 2 cents, as compared to $0.85 per share in corresponding period last year. The decrease in EPS for the quarter on year on year basis was mainly driven by higher O&M expenses, lower energy margins and increase in shares outstanding (share dilution). Operating expenses increased to $5.7 billion mainly due to higher operating, fuel and power costs for the company. The company also registered net revenue of $6.89 billion for the first quarter 2013, beating the analysts' consensus of $6.56 billion.
Commonwealth Edison earnings decreased by $0.02 to $0.10 per share. Gross margin for the segment increased by 1.3% to approximately $780 million, driven mainly by higher sales volume and favorable weather conditions. The segment also filed a request of increase in rate base amounting to $311 million.
PECO segment earnings for the quarter were unchanged at $0.14 as compared 1Q 2012. Gross margin for the segment improved 5.4% due to favorable weather conditions. BGE segment earnings for the quarter increased by $0.06 to $0.09 per share as compared to 1Q 2012. The largest operating segment of EXC, Exelon Generation, experienced a decline in earnings of 17% to $0.39 per share year on year basis. The earnings for the segment were adversely affected by lower realized energy margin and capacity prices, share dilution and higher operating costs. However, nuclear plants for 1Q 2013 achieved capacity factor of 96.4% that bodes well for the company.
Dividend and cash flow flexibility
The company currently offers a quarterly dividend of $0.31 per share, and a decent dividend yield of 4%. Earlier this year, a dividend cut of $0.215 per share or $700 million a year was announced by the company. In total, the company will have excess $2-$3 billion cash over a forecasted period of 5 years to pay down debt and make capital expenditures [CAPEX]. CAPEX will be focused on contracted assets type including solar and wind energy. The company also indicated that equity issuance would not be required to fund growth spending. The CAPEX incurred by the company would lead to base rate increases and eventually bottom line expansion.
Optimism still prevails in the retail business of EXC despite the margin headwind due to very competitive environment. Management believes the company can earn $2-$4/MWh margin for industrial and commercial segment in future and retail business is viewed as managing regional basis risk. Analysts are anticipating EPS of $2.50 for the current year, 2013.
EXC has exposure to changing commodity prices to which its merchant business is exposed. Also, the company's regulated subsidiaries are exposed to regulatory issues. These factors can adversely affect EXC's bottom line.
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Consolidated Edison Inc. (ED)
Price to Book
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Source: Yahoo Finance
EXC offers investors a good investment opportunity at current valuations. The company has a lower forward P/E of 13.5x as compared to its competitors. Moreover, EXC has attractive P/B, P/S and debt to equity in comparison to its competitors' average. Using the utility sector forward P/E of 15.7x and EXC's estimated 2014 EPS of $2.34, I calculated price target of $36.7 for the stock. This provides upside potential of 17%. Therefore, I recommend a 'buy' rating on the stock.