Seeking Alpha
Value, growth at reasonable price, contrarian, newsletter provider
Profile| Send Message|
( followers)  
Exelon (NYSE:EXC) is a holding company for Commonwealth Edison (serving 3.8 million customers in Illinois) and PECO Energy (with 1.6 million electric and 481,000 gas customers in Pennsylvania). They also market energy elsewhere in the Mid-Atlantic and Midwest regions. Their heavy reliance on nuclear power generation is a big plus as America seems to be moving towards penalizing carbon use (which will make nuclear power ever more price competitive).
Exelon operates 17 nuclear reactors producing about 20% of all US nuclear capacity and approximately 4% of America’s total electricity generation.
Exelon trades today at $49.20 and yields a generous 4.27%. At its peak prices in 2007 and 2008 these shares fetched $86.80 and $92.10, respectively. Why are they so cheap now? Besides the general market weakness in 2008 through early 2009 Pennsylvania had artificially held back price increase to PECO customers in Pennsylvania. That has impacted profits and is the biggest contributor to lower profit expectations for 2010 versus 2009.
Here are Exelon’s per share numbers from continuing operations as reported by Value Line:
Year
Sales
C/F
EPS
Div.
Avg. P/E
52-Week Range
Avg. Yield
2001
23.58
5.06
2.20
0.91
13.2x
19.40-35.10
3.1%
2002
23.13
5.03
2.40
0.88
10.5x
18.90-28.50
3.5%
2003
23.89
5.02
2.44
0.96
11.8x
23.00-33.30
3.4%
2004
21.85
5.68
2.75
1.26
13.0x
30.90-44.90
3.5%
2005
23.06
6.19
3.21
1.60
15.4x
41.80-57.50
3.2%
2006
23.37
6.71
3.50
1.64
16.5x
51.10-63.60
2.8%
2007
28.62
7.43
4.03
1.82
18.2x
58.70-86.80
2.5%
2008
28.66
7.64
4.10
2.05
18.0x
41.20-92.10
2.8%
2009*
26.03
7.85
4.04
2.10
12.1x
38.40-59.00
4.3%
* 2009 data includes consensus estimates for Q4
Right now Zacks and others see 2010 EPS coming in at about $3.80 making Exelon’s forward multiple a very reasonable 13x. The current yield is now close to the best ever for Exelon subsequent to their present configuration (since the October merger of PECO and Unicom which formed this company).
The capped price structure now imposed on PECO are scheduled to expire starting in January of 2011 which should set the stage for renewed earnings growth starting that year. Value Line sees EPS of $5 within 3 – 5 years.
Value Line assigns Exelon their highest (#1) rating for safety and also gives them an ‘A+’ financial strength ranking. They note EXC’s ‘price stability’ and ‘earnings predictability’ as very high with 90th and 95th percentile levels (with 100th being best).
Even fourteen times the likely trough estimate of $3.80 for this year would bring EXC shares back to > $53 by year end. That same multiple on the $4.20 or better expected for 2012 could easily support a move back to about $58 - $59 /share within 18 – 24 months.
Are those reasonable targets? Standard and Poor's carries a 12-month goal of $60 /share and Morningstar gives Exelon a 5-star rating and sees ‘fair value’ as $73 /share. Exelon shares actually changed hands at prices of $57.50 and higher during each calendar year 2005 – 2009.
I see Exelon as a good choice for conservative accounts. It is especially attractive for those with a two-year or longer horizon as that should allow for the resumption of earnings growth and the chance for an appreciably higher P/E. The 4.25% current yield makes waiting easy as it is better than today’s rate on 10-year treasuries.
Option savvy individuals might want to consider writing (selling) some LEAP puts with 2012 expiration dates. Here are a couple that look especially attractive right now.
Jan. 2012 Expiration
Per Share Put Premium
Break-Even Price
Margin of Safety from $49.20
$40 strike price
$4.00
$36.00 /sh.
26.8%
$50 strike price
$8.90
$41.10 /sh.
16.4%
$60 strike price
$15.90
$44.10 /sh.
10.3%
In a worst case (which assumes exercise of the puts) you would end up owning EXC shares at prices from 10.3% - 26.8% below the current quote (and with a higher yield than available today). At best (if the options sold expire worthless) you would make from $4.00 - $15.90 per share for having been exposed to the possible purchase of these high-quality, good yielding shares.
The break-even points on the $40 and $50 puts would be below the absolute lows for EXC shares touched in 2005-2006-2007 and 2008.
Disclosure: Long EXC shares, short EXC options
Source: Exelon: Getting to Know Nukes