Using Ratios To Identify Stocks Set To Outperform Their Peers: Electric Utility Rankings

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Includes: DUK, ED, ETR, EVRG, FE
by: Stock Scrutiny
Summary

Introducing the electric utility industry to my research project.

Included are the stocks' rankings in debt, profitability, efficiency, and growth categories.

Weighting of each category is presented, as well as adjusting of scores on buyback rates.

Intro

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.

Ratio Research

Debt

Company Name Total Debt/ Total Equity Quick Ratio Current Ratio Defense Interval Current Liquidity Ratio EBIT/ Interest Expense
Entergy 200.1% 0.34 0.50 19.4 759.4 1.38x
FirstEnergy 286.2% 0.46 0.52 20.2 1,161.0 2.23x
Evergy 85.0% 0.41 0.59 20.0 659.6 3.73x
Consolidated Edison 123.8% 0.56 0.62 48.9 704.4 3.06x
Duke Energy 132.2% 0.44 0.65 12.0 734.4 2.60x

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

Profitability

EBIT Margin Gross Margin Net Margin Return on Assets Net Income per Employee Effective Tax Rate
Entergy 9.6% 18.1% 7.8% 1.8% 63,015.4 25.0
FirstEnergy 22.2% 31.0% 9.1% 2.5% 81,799.3 32.4
Evergy 25.3% 31.6% 12.5% 2.7% 110,885.8 9.8
Consolidated Energy 20.5% 39.1% 11.2% 2.7% 90,285.5 22.5
Duke Energy 22.2% 27.4% 10.8% 1.8% 87,989.9 14.6

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

Efficiency

Sales per Employee Return on Equity Capital Expenditure Ratio Employee Cost Per Unit of Revenue Total Asset Turnover Return on Invested Capital
Entergy 0.81x 10.0% 2.6 0.03 0.23x 3.7%
FirstEnergy 0.90x 19.0% 4.2 0.38 0.27x 4.1%
Evergy 0.88x 7.7% 4.0 0.06 0.22x 4.4%
Consolidated Edison 0.81x 8.6% 3.5 0.18 0.24x 4.3%
Duke Energy 0.82x 6.2% 2.6 0.05 0.17x 2.9%

Current Efficiency Scores

1. First Energy- 2

2. Evergy- 2.67

3. Consolidated Edison- 3.17

3. Entergy- 3.17

5. Duke Energy- 4

Growth

Free Cash Flow Growth Revenue Growth Total Debt Growth EPS Growth Change in Working Capital Growth
Entergy -735.6 -0.6 30.9 244.0 -476.1
FirstEnergy -427.6 -24.2 -11.2 -18.9 -193.4
Evergy 2,890.6 73.9 138.1 19.7 230.0
Consolidated Edison -459.6 -1.5 45.1 9.1 -310.9
Duke Energy -2,347.8 9.7 36.3 -8.7 -278.8

Current Growth Scores

1. Evergy- 2

2. FirstEnergy- 3

2. Entergy- 3

4. Duke Energy- 3.4

5. Consolidated Edison- 3.6

Weighting

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
Entergy -5.5 -0.085564304
FirstEnergy -15.7 -0.058792651
Evergy -80.1 0.1
Consolidated Edison -5.2 -0.086351706
Duke Energy -3.9 -0.1

Complete Scores

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.

Conclusion

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.