Is Exelon Cheap?

| About: Exelon Corporation (EXC)

Summary

The stock offers good value in a low-growth, competitive energy sub-sector.

Strong financial position and healthy credit metrics make it a safe investment.

Dividend growth is not under threat.

Exelon (NYSE:EXC) is one of the most attractive utility companies available at the moment. The company has solid financial position and attractive valuation. There are some positive catalysts that should push the stock price higher in the next few quarters. Utilities are mainly defensive stocks. One should not expect fireworks. They tend to give good dividend yield along with some moderate stock price appreciation. The landscape has become extremely competitive, especially for companies like Exelon due their focus on nuclear energy. Cheap natural gas prices have resulted in increased usage of natural gas in electricity generation.

Exelon has some of the best credit and valuation metrics in the industry. The table below compares Exelon's metrics with some of its peers. All the calculations were done by the author and the data was taken from SEC filings. Enterprise value data was derived from Ycharts.com.

Full year results were available for all the players. These numbers are the most recent reported debt and EBITDA figures for these companies. I decided to compare Exelon against Duke Energy (NYSE:DUK), American Electric Power (NYSE:AEP) and Southern Co (NYSE:SO). Exelon and Duke look a better match based on credit metrics. Exelon has the lowest leverage ratio of 4.24x. The leverage ratio here represents a ratio between the long-term debt and EBITDA. Duke Energy's leverage is also respectable at 4.78x. However, American Electric and Southern Co have leverage ratios in excess of 5x. The scale of business for these companies is so large that even such high leverage ratios do not pose a threat to the overall health or the existence of these entities.

The last column shows the valuation metrics. Since there is some variation in the size of these businesses and non-cash expenses are also quite large, EV/EBITDA is the most appropriate measure for comparison, in my opinion. Exelon is the only stock with an EV/EBITDA multiple in single digits (9x). Duke Energy is relatively expensive at 12x EBITDA and American Electric is the costliest with a ratio of 16x. Exelon is clearly trading at a discount compared to its peers. The discount ranges from 22-77% while the overall industry average multiple of 10x is a little closer to Exelon's own EBITDA multiple. It shows that other players in the industry have lower multiples. However, this does not necessarily mean those stocks are cheaper. These businesses have a wide-moat and large scale operations which gives them a cost advantage to some of their smaller peers.

Exelon is going to take control of FitsPatrick nuclear plant as the U.S. Nuclear Regulatory Commission is going to rule on the deal this spring. The plant has been refueled and the power generation will start soon. Exelon paid around $55 million for the refueling and the plant will run for the next two years on this refueling. Subsidies and increased earnings from this plant are going to be one of the catalysts for the stock in the next two quarters. The transfer is likely to happen from the second quarter, so we will see the benefit by the end of second quarter results. Please read my previous article to get an idea what sort of financial benefit this plant will bring to the company.

The company has increased the quarterly dividend to $0.3275 for the first quarter of the year. This represents a 2.5% increase from the previous dividend. It is not a large increase. However, investors should keep in mind that the competitive nature of the sector has resulted in utilities becoming cautious. These businesses do not experience rapid growth in revenues and cash flows. Their earnings, cash flows and revenues are predictable and have a lower growth rate than some of the other sectors. However, they do offer a stable source of income with a reasonable growth rate. One of the advantages of investing in these businesses is that most of the capacity is contracted with solid buyers on long-term contracts, and in Exelon's case, some environmental efforts (clean energy push) result in subsidies.

Exelon is nicely priced and there is a chance of a push towards $40 in the next few months due to the increased cash flows from these subsidies. The prospect of capital gains along with a steady income has the potential to make an attractive total return for Exelon shareholders in this highly competitive energy sub-sector. Exelon's dividends are safe and increased cash flows from FitsPatrick plant should give further support to dividends.

Disclosure: I/we 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.

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