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Exelon Corp. (EXC) has faced challenging situations in the recent past due to the fall in the natural gas prices, lower recent PJM West capacity prices and a dividend cut that was announced earlier. Moreover, EXC has lower profit margin, ROE, ROA and dividend yield in comparison to its peers as shown below. Due to these aforementioned factors, I remain bearish on EXC.

The potential near term performance drivers for EXC are the forward natural gas prices and future outlook of power demand and supply. EXC is highly sensitive to changes in natural gas prices. The drop in natural gas prices in 2012 did not bode well for the company and the stock price. According to Energy Information Administration [EIA], natural gas prices are likely to rise in the upcoming years, which I believe will be a positive sign for the company. It is estimated that every $1 mmBtu rise in natural gas prices will move EXC's EBITDA by $350 million to $450million for the next two years.

Lower capacity prices announced in May 2013 also does not bode well for the company. The drop in the capacity prices indicates an excess power supply in spite of the considerable coal plant retirements. Weak PJM capacity prices are a concern for EXC, as it has almost 65% of its deregulated fleet located in the PJM grid region. PJM can now receive more supply for the neighboring grids, which preclude the need for new power plants in the PJM regions, translating into lower capacity revenues for the deregulated power generators in the PJM region.

Another important catalyst for EXC's stock price, as like other utility stocks, is the rise in the bond yields. If the bond yields continue to rise, as it has in the recent months, EXC stock price will be negatively affected by it. Currently, 10 year bond yield has increased to 2.55% from 1.63% in May.

BGE (subsidiary of EXC) filed a rate case increase in May to adjust the grid investments. The filed case seeks a rate increase of $101.5 million along with a ROE of 10.5%. The approval for the pending rate case will positively impact the company's stock price.

EXC announced a dividend cut of 41% earlier this year in an effort to maintain its investment grade credit rating. The company lowered its annual dividend to $1.24 per share, with a long term payout ratio of 65% - 70%. The new annualized dividends offered by the company are backed by its regulated and deregulated business operations as the company has strong operating cash flow yield of more than 20%. EXC currently offers a dividend yield of 4%.

Conclusion

Profit Margin

ROE

ROA

Dividend Yield

EXC

4%

4.5%

2.5%

4%

Duke Energy (DUK)

10%

7%

3.5%

4.4%

Southern Company (SO)

12%

11%

4%

4.5%

PPL Corp.

13%

13%

4%

4.8%

Source: Yahoo finance

EXC has an unimpressive performance in comparison to its peers. The company has lower profit margins, ROE, ROA and dividend yield in comparison to its peers as it is evident in the table above. Also, lower natural gas prices, weak PJM capacity prices and rising bond yields do not seem to be good signs for EXC's stock price performance. Therefore, I recommend investors to refrain from buying EXC.

Source: Exelon: Avoid This Utility Stock