Is Exelon A Buy?

May.30.14 | About: Exelon Corporation (EXC)

Summary

Exelon has received positive ratings recently which have driven the stock price up roughly 10% during the current week.

Within this article we discuss the accuracy of these analyst recommendations and the fundamentals of Exelon.

We also provide a regression analysis of the analyst price recommendations versus the subsequent price for your own download and analysis in excel.

Exelon (NYSE:EXC) has risen almost 10% this week and continues this trend today (5/30/14). The bulk of this increase can be attributed to the announcement made by PJM Interconnection on Tuesday indicating that the price per megawatt per day would rise from $59.37 currently to roughly $120.00 by the middle of 2017. Since then some analysts have revised their price targets, and the overall "sell" rating by the analyst community for EXC has now been modified to a "hold" consensus rating.

However, if one were to chart the timing of these analyst ratings we can see that they have not been terribly accurate (provided courtesy of TipRanks):

Analyst Ratings Charted According to TipRanks.comClick to enlarge

As of today, The Jefferies Group has marked EXC as a Hold as they upgraded their rating for the company from an "Underperform" as well as revising the price target from a $29.00 per share to $37.50. As some groups indicate, there could therefore be a 3.9% upside during the next several days based on this rating. This was based on research done during the early 2000's era, which indicated the following:

Price target revisions are accompanied by a mean five-day abnormal stock return of -3.9% around downward revision announcements and +3.2% for upward revisions.

It is difficult however in the case of EXC to be sure that this will be the case. As one can see, the analyst price targets and recommendations for EXC have generally been wrong. While EXC will most likely continue to rise during the current week and this is certainly driven in part by the analyst ratings, any true evaluation of the company should be based on more solid fundamentals.

The P/E Ratio is currently 17.45, which does not indicate a deep value play but certainly does indicate a solid sense of value for the company. However, it is possible that, given the industry EXC is in, that the Cyclically Adjusted P/E Ratio might be a better metric as it takes the current price over the previous 10 years of earnings as adjusted for inflation. You can see from our site at caperatio.com that the CAPE Ratio for EXC is roughly 10.64, which shows a discounted stock price with respect to historical earnings data.

The P/B Ratio is currently at roughly 1.4, which once again does not indicate a deep value play. However, if one looks at the historical trend EXC can easily trade at much higher prices with respect to the Book Value.

EXC Price to Book Value Chart

EXC Price to Book Value data by YCharts

Qualitative Factors - instead of simply looking at the valuation of EXC with respect to the metrics I would really place a great deal of emphasis on the report from PJM Interconnection as they have a strong feel for the pulse of the business. If you go to their website, you can download data and conduct your own analysis in an attempt to project the trend of future prices per megawatt per day. They trade in the wholesale markets, and generally speaking, the analysts within the industry are better than the analysts of the stock market.

Analyst Price Targets:

However, if we wanted to put together a quick model for the performance of analyst price targets during the last two years with respect to the actual performance of the stock price, we can put together a regression model and plot the analyst price targets as the independent variable and the actual subsequent price average as the dependent variable. Based on 100 price targets from the Analyst Ratings Network for EXC, I have put together the following regression models:

Regression Statistics
1-Week 1-Month 2-Months 3-Months
Multiple R 0.746664 0.705422 0.700839383 0.631723
R Square 0.557507 0.49762 0.49117584 0.399074
Adjusted R Square 0.552945 0.492332 0.48525928 0.392004
Standard Error 2.115797 2.190684 1.962304987 2.003067
Observations 99 97 88 87
Coefficients
Intercept 15.05786 16.18178 17.47156012 19.60589
Price Target 0.532069 0.485918 0.42883508 0.361007
Click to enlarge

And Plotted Out along X and Y the 3-Month Model looks like this:

Click to enlarge

We have here, 4 different regression models based on the subsequent average price of the stock during a 1-week period, 1-month period, 2 months, and 3 months. Our R^2 shows us the level of accuracy for the 'fitness' of the model. As you can see (from the table above) our 1-Week model is roughly 55.7% accurate while the 3-Month model is roughly 39.9% accurate in utilizing the analyst price targets to explain the subsequent change in stock price.

This is not terribly good as often times the R^2 will be higher as analyst price targets are generally closer in explaining the subsequent change in the stock price. If you are interested in the analysis that was conducted you can download it in excel right here.

Conclusion:

If you invest in Exelon, it should not be as a result of the price targets set by analysts who do not have a high correlation with respect to the actual subsequent prices. Instead, you should invest in Exelon because the fundamentals are sound and there is a strong indication that the future market will be growing. Once the price falls a little bit down from the current high, and the optimism of the market driven mostly by the recent positive analyst recommendations begins to fall off, I would certainly recommend them as a "buy."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.