Exelon Is A Buy At This Price

Aug.28.14 | About: Exelon Corporation (EXC)

Summary

Exelon has filed an application for the approval of a $6.8 billion deal through which Exelon will acquire Pepco Holdings.

In the second quarter of 2014, Exelon's performance improved and the company reported earnings of $0.51 per share that was slightly higher than the consensus estimates.

Exelon's share is currently priced at a forward price-to-earnings multiple of 12.78 times, which makes this stock relatively inexpensive compared to the industry.

Back in April, Exelon Corporation (NYSE:EXC) announced it would acquire Pepco Holdings. Recently, Exelon filed an application with the Maryland Public Service Commission for the approval of a $6.8 billion deal. After the announcement of this deal, Exelon announced that it would spend $50 million in charitable contributions to communities served by Pepco over the next decade. Exelon also discussed the economic impact and estimated around 6,300 to 7,000 new jobs would be added in the region. Both of these side aspects of the deal may help to smooth the approval process.

Exelon is currently trading at $32.25, which is lower than its 52-week high of $37.73 and higher than 52-week high of $26.45. Exelon is currently underperforming compared to the S&P 500 Index. The stock outperformed the S&P 500 and competitors back in May and June. Over the last year, this stock has returned around 9.30% and boasted a 3.84% dividend yield.

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Source: YCharts

Earnings Surprise and Forecast

Exelon's financial results were a bit volatile in the last four quarters. In the third quarter of 2013, Exelon performed well and reported $0.78 in per share earnings, beating the consensus estimate of $0.66 in per share earnings. However, in the next two quarters, its financial results tumbled. In the fourth quarter of 2013, analysts expected $0.538 in per share earnings, but Exelon reported $0.50 in per share earnings. Similarly, in the first quarter of 2014, Exelon missed the consensus estimate by a wider margin. Exelon reported $0.62 in per share earnings, while analysts estimated $0.687 in per share earnings.

Source: markets.ft.com

In the second quarter of 2014, Exelon's performance improved and the company reported earnings of $0.51 per share that were slightly higher than the consensus estimate. The company underperformed in the second quarter of 2013 by 3.77%. Exelon's business outlook is quite positive, and its recent initiatives can lift the earnings results in the coming quarters. Going forward, it is estimated that Exelon will generate per share earnings of $0.70 in the third quarter of 2014 and $0.568 in the fourth quarter of 2014.

Exelon's Recent Performance

Exelon performed well in the second quarter of 2014, and its diluted per share earnings of $0.51 were slightly ahead of estimates but two cents lower than the figure reported in the second quarter of 2013. Exelon achieved its performance target, and all of its segments continued to deliver strong operating performances. The two-cent decline in earnings was primarily due to lower realized energy prices and decreased nuclear and fossil output during 2014, primarily due to outage days. On a GAAP basis, the quarterly earnings per share were $0.60, compared to $0.57 in the second quarter of 2013.

During the second quarter of 2014, Exelon generated $6.024 billion in revenues, and this is around 1.9% lower than the $6.141 billion figure reported in the second quarter of 2013. However, the company's top line performance is better when compared to the figures reported in the first half of 2014. Exelon's revenues increased to $13.261 billion in the first half of 2014, compared to $12.223 billion in the first half of 2013; and this translates into an 8.5% increase in the top line.

Generation, which consists of owned and contracted electricity generation facilities, was able to generate $3.789 billion in operating revenues. Generation also included 100 percent of CENG's operations in the second quarter. The GAAP net income was $340 million, compared with the net income of $330 million in the second quarter of 2013. This increase was primarily due to favorable pricing in the RPM and PJM markets. ComEd, which consists of electricity transmission and distribution operations, recorded a net income of $111 million, compared with the net income of $96 million in the second quarter of 2013. Pepco, which consists of electricity transmission and distribution operations and retail natural gas, reported a GAAP net income of $84 million, compared with the $72 million reported in the second quarter of 2013.

Exelon's Recent Developments

Exelon is making progress in different directions, and has made a number of solid steps towards fueling its earnings growth. Recently, Exelon agreed to buy fuel cell power plants, making it Exelon's first investment in systems from Bloom. These plants will have the capacity to generate 21 megawatts of power, and commercial customers will purchase the electricity. In another initiative, Exelon bough a Gulf Coast Liquid Natural Gas plant that is slated to export natural gas. Annova LNG is a $1.3 billion LNG export terminal start-up at the premature building stage, and Exelon purchased a 96% stake in that start-up. These steps will further strengthen Exelon's power generation portfolio.

Exelon already owns utilities that serve Philadelphia and Baltimore. Exelon's $6.8 billion acquisition of Pepco Holdings will bring 2 million customers and help the company expand in the eastern U.S. As a result, this combined company will be able to serve 10 million customers; and this will allow the company to maintain its earnings growth in the future.

Conclusion

Exelon's share is currently priced at a forward price-to-earnings multiple of 12.78 times, which makes this stock relatively inexpensive compared to the industry's 22 times earnings multiple for the same period of time. Along with an attractive valuation, Exelon's dividend profile is also strong, which makes it an attractive stock for dividend seekers. This stock is currently paying $1.24 in annual dividends, with a healthy 3.84% yield. Exelon has not increased its dividend in the last five quarters, primarily due to volatile per share earnings results. However, due to the expected earnings growth, it is reasonable to expect that Exelon will increase the quarterly dividend in the third quarter of 2014. Also, Exelon is still trading below its 52-week high, and this is a good time to buy the stock in order to reap the upside potential.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.