Entergy (ETR) is an electric holding company that serves over 2.7 million customers in Arkansas, Louisiana, Mississippi and Texas. The company owns and operates power plants with 30,000 megawatts of capacity. With a market cap of $12.3B and a healthy 4.75% dividend yield, the company is the second-largest nuclear generator in the United States.
The stock has fallen 7% (only down -1.24% YTD), since the March 11 Fukushima nuclear disaster in Japan as safety concerns heightened after the crisis. Excelon (EXC), which has the largest nuclear portfolio in the industry, is down 11% since March 11. On the other hand, the Utilities Select Sector SPDR ETF (XLU) is up nearly 9%.
Certainly, Entergy is feeling the pain from strong anti-nuclear sentiment that followed the Fukushima disaster. It is also facing increased political pressures. The Vermont legislature denied the 20-year license renewal of the company's nuclear power plant "Vermont Yankee", despite regulatory approval from the US Nuclear Regulatory Commission. Entergy has sued the state. Currently, the company's operating license lasts until March 2012.
Other plants with upcoming license expirations include: Pilgrim (June 2012), Indian Point 2 (September 2013) and Indian Point 3 (December 2015).
Nature and Prospects of the Business
Entergy recently issued its 2012 guidance, with CEO J. Wayne Leonard explaining that the company "continues to work toward its long-term outlook of a 6 to 8 percent compound annual net income growth rate over the 2010 -- 2014 horizon".
However, questions continue to surround nuclear license renewals. Entergy has noted that increased government regulation of nuclear facilities could result in increased costs and capital requirements associated with operating the company's plants. In addition, the possibility of not receiving license renewals on plants is very concerning as well.
Entergy is regarded as a responsible utility company dedicated to the environment and the communities it severs. In the past Entergy has been praised by Forbes as being among the "most trustworthy large-cap companies"--most recently in 2008. This year, Corporate Responsibility magazine named Entergy of the 100 Best Corporate Citizens" in the country. Lastly, Entergy is the only US Utility company to make the Dow Jones Sustainability Index nine years in a row, meaning that the company's overall environmental, social and economic sustainability performance was in the top 10% of the sector.
Quick Ratio: 0.74, Industry: 0.97
Debt to Capital: 57.3%, Industry: 52.9%
Interest Coverage: 5.77, Industry: 5.33
S&P Credit Rating: BBB
I'm not a modeling expert, so I like to take advantage of WikiWealth's DCF model that you can play around with. Assuming at 1.8% top line growth rate (the 10 year CAGR for Entergy), and holding Gross Margin, Operating Margin, at their 5 year averages (as a percent of revenue), I produce a value of $112. The corresponding margin of safety is: 37.5%
Ben Graham Intrinsic Value
Intrinsic Value = Current Earnings x (8.5 +2 x expected annual growth rate)
I will use a 5% CAGR, a more conservative estimate compared to the company's guidance of 6-8% for the next few years. The resulting instrinsic value is: $130.1.The margin of safety is: 46.2%
7.03 (TTM EPS) X (8.5 +2(5)) = 130.1.
So, given that Entergy is clearly facing short-term challenges associated with nuclear, is it still worth a buying?
The company's financial strength is acceptable for a utility, but not spectacular. Certainly, there should be little issue payout the dividend, which looks very appealing.
Entergy looks attractive based on its cheap valuation and a comfortable margin of safety. There is tremendous value here, but also a great amount of risk associated with the nuclear license extensions.
Perhaps the market has overreacted to the Japan nuclear crisis and the stock has been dragged down for "transient reasons", as Eddy Elfenbein writes. On the other hand, perhaps the US will change its future nuclear policy and shift toward phasing out nuclear power generation. I am by no means an expert on the subject, but it seems like the US Nuclear Regulatory Commission continues to approve applications for operating license renewals. For now, it appears that Entergy's renewals should be safe in terms of NRC approval. However, it remains to be seen whether local governments have the ability to block these approvals- the pending Vermont Yankee case should set this precident.
Regardless, for investors with some risk appetite, Entergy could be a nice utility to add to a portfolio that needs yield.
Target Price: $78 (average of the DCF and Ben Graham value, with a 35% margin of safety).