Exelon Corporation - Set For Big Profits

Jun.10.14 | About: Exelon Corporation (EXC)


Exelon is on momentum on the back of good news.

Exelon’s announced merger and planned investments will ensure its long-term growth.

Its dividends are sustainable, and the company is set to generate big profits.

Exelon Corporation (NYSE:EXC) is on momentum since the start of this year. On the back of good news and better financial performance, EXC's stock reached a 52 week high of $37.73 per share, gained more than 36% since the start of 2014. Exelon is looking to keep this momentum. It is constantly looking for opportunities, which align with its growth strategies. It has recently announced an agreement with Pepco Holdings. Based on the agreement, Exelon and Pepco will merge to form a new company which will retain the Exelon name. This merger is expected to bring around $0.20 per share increase in earnings. Further, this merger will also bring benefits for Pepco customers in the form of rate credits, energy efficiency programs, low-income assistance and enhanced storm restoration capabilities.

For the next five years, Exelon already planned to invest around $15 billion on BGE, PECO and ComEd to grow their rate bases and the addition of Pepco will add an incremental $8.3 million in regulated rate base. This addition will ensure strong growth in earnings and cash flows. Investments in transmission, smart technologies, and system reliability, and distribution will decrease the outages and enhance customer service. The company is also making investments in its contracted renewable portfolio and expanding its foothold in the natural gas business.

At the moment, Exelon is on momentum with its smart investment approach. The company has been posting better revenues quarter over a quarter. At the end of the latest quarter, its top and bottom line increased compared to the past year quarter. It has generated earnings per share of $0.10 compared to the negative $0.01 in the past year quarter. Its revenue growth is strong, but due to the high direct costs, the company is not able to generate thick margins. It has generated revenue of $7.2 billion while net income was only at $90 million in the past quarter. I think Exelon needs to do more work in order to enhance its operational efficiencies and costs that are under its control, to give a boost to profits.

On the other hand, its cash generating potential is strong enough to support capital investment. In the past year, its operating cash flow was standing at $6.3 billion when capital investment was at $5.4 billion, leaving $948 million in free cash flows. Amid this, its free cash flows are not covering its dividend payments of $1.24 billion, which is a red flag for its dividend. I believe it has the ability to sustain its current dividends, but I do not expect any significant increase in its dividends in the short-term. However, going forward, we can expect growth in cash flows with the announced merger and investments on BGE, PECO and ComEd to grow their rate bases. Its balance sheet is strong enough to complete the recently announced merger, and going forward, the combined company will have a strong liquidity profile supported by $9.5 billion in revolving credit facilities.

In Conclusion

The Pepco merger will bring strong earnings growth for the combined company. Further, Investments in transmission, smart technologies, and system reliability, and distribution will decrease the outages and enhances customer service and consequently results in an increased rate base. The company's cash position is also strong to support investments and returns. Though, I am not expecting any increase in its dividends in the sort-term, prospects look bright on a long-term basis with its planned investments of $15 billion and announced merger. In addition, PJM Interconnection predicts that the price per megawatt will increase in the coming days which created a lot of hope in investors. At the moment, Exelon is trading around its 52-week high. I believe Exelon is a long-term pick, but investors should wait for a market correction.

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.