My next article looks to add the electric utility industry to my research. Any new readers that wish to see a detailed explanation on how I arrive at these results, please see my introductory article that elaborates on my process. As a quick summary, I believe that over the long run, stocks that rank higher than their competitors financially (according to my assortment of ratios) will outperform stocks that have a lower ranking in that same industry. Ratios have their shortcomings, but if utilized properly, they can be helpful in analyzing a company's current financial position.
Included in this analysis is Entergy (ETR), FirstEnergy (FE), Evergy (EVRG), Consolidated Edison (ED), and Duke Energy (DUK). Pricing data is gathered from Nasdaq, while scores were calculated using financial statements from E-Trade.
|Company Name||Total Debt/ Total Equity||Quick Ratio||Current Ratio||Defense Interval||Current Liquidity Ratio||EBIT/ Interest Expense|
Current Debt Scores
1. Consolidated Edison- 1.67
2. Evergy- 2.17
3. Duke Energy- 3
4. First Energy- 3.67
5. Entergy- 4.5
|EBIT Margin||Gross Margin||Net Margin||Return on Assets||Net Income per Employee||Effective Tax Rate|
Current Profitability Scores
1. Evergy- 1.17
2. Consolidated Edison- 2.33
3. Duke Energy- 3.17
4. First Energy- 3.67
5. Entergy- 4.67
|Sales per Employee||Return on Equity||Capital Expenditure Ratio||Employee Cost Per Unit of Revenue||Total Asset Turnover||Return on Invested Capital|
Current Efficiency Scores
1. First Energy- 2
2. Evergy- 2.67
3. Consolidated Edison- 3.17
3. Entergy- 3.17
5. Duke Energy- 4
|Free Cash Flow Growth||Revenue Growth||Total Debt Growth||EPS Growth||Change in Working Capital Growth|
Current Growth Scores
1. Evergy- 2
2. FirstEnergy- 3
2. Entergy- 3
4. Duke Energy- 3.4
5. Consolidated Edison- 3.6
After implementing performance-based weighting to each category, I have determined that the efficiency ratios are most correlated to price performance, followed by growth, profitability, and debt. Therefore, instead of the equation for finding the cumulative score of a stock looking like this:
(Debt Score x .25) + (Profitability Score x .25) + (Efficiency Score x .25) + (Growth Score x .25) = Final Score
... it now looks like this:
(Debt Score x .19) + (Profitability Score x .23) + (Efficiency Score x .30) + (Growth Score x .28) = Final Score
With this weighting, more value is given to categories with the greatest correlation to price performance, which, in turn, should lead to more accurate final scores. To answer any lingering questions about how I determine weighting, please see my article that introduces the concept. Here are the most recent weight-adjusted scores for the electric utility industry:
1. Evergy- 2.04
2. Consolidated Energy- 2.81
3. FirstEnergy- 2.98
4. Duke Energy- 3.45
5. Entergy- 3.72
Adjusting For Share Buybacks
In my most recent article, I introduced how share repurchases can influence share price, and thus, why my future analyses will attempt to account for companies' strategies in this area. For more details on how I determine these upcoming weights, please see the article that explains its implementation. In short, I standardize each company's rate of common shares outstanding reduction to have an effect of between -.1 and .1, with the stock that retires the greatest percentage of its shares to receive the .1 improvement in its score and so on. Here is a table showing the data:
|Share Repurchase Rate||Effect on Score|
1. Evergy- 2.14
2. Consolidated Edison- 2.72
3. FirstEnergy- 2.92
4. Duke Energy- 3.35
5. Entergy- 3.63
By quite a wide margin, Evergy had the best score. They didn't have a worse than average score in any categories, even posting sub-2's in the Profitability group, which is pretty rare to do. While their financials do look really strong compared to the rest of the stocks on this list, it is worth noting that their buyback rate was the worst among the group. Nonetheless, the negative effect seen from this was not nearly enough to push Evergy out of first place.
Two other stocks had better than average scores- Consolidated Edison and FirstEnergy. Con Edison performed extraordinarily well in the debt and profitability categories but was the worst scorer in growth, which hurt any chance it had at the top spot. FirstEnergy's performance was not as even across the board. Debt and profitability, contrary to Con Edison, were what really damaged the complete score of FirstEnergy. This was partially mitigated by the stock having the best efficiency ratios in the entire group as well as a repurchase rate that improved the final score when accounted for.
Duke Energy and Entergy round out the bottom of the rankings. In the fourth place position was Duke Energy, who sports a 3.35 complete score. The firm didn't do particularly well in any category, however, it did receive the maximum boost when accounting for share buybacks since it issued the least amount of common stock. Entergy saw the worst score among the 5 electric utility stocks. Debt and profitability were extremely troublesome for the company, as it took last place in almost every single metric. The only thing saving it from an even worse score was the fact that it almost had the best stock buyback situation.
Ratios certainly aren't the be all and end all, but I'm a firm believer this type of strategy can serve as a useful supplement for investors conducting a holistic analysis. Since this is the first year I ranked electrical utilities, the scores are just a snapshot in time of their respective financial strengths and weaknesses. Where the real value will be drawn is when multiple years of scores can be analyzed for trends or patterns.
Feel free to leave any feedback or suggestions in the comment section, and if you wish to see future articles ranking different industries as well as statistical breakdowns of historical scores and their relation to price, click the orange follow button at the top of the page.
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.