Exelon Corporation: Strong, Defensive, But Unexciting
Summary
- Though Exelon Corporation has a robust balance sheet, its profitability ratios are way lower than the profitability of other companies in its sector.
- The company has been a steady but unexciting performer for investors that have been holding it for more than 3 years.
- To buy or trade this stock, you need a well-defined strategy and a long-term vision.
- I do much more than just articles at The Lead-Lag Report: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
Almost every way we make electricity today, except for the emerging renewables and nuclear, puts out CO2. And so, what we're going to have to do at a global scale is create a new system. And so, we need energy miracles. - Bill Gates
At this time, I am neutral on Exelon Corporation (NASDAQ:EXC) despite its robust balance sheet. However, after this COVID-19 disruption blows over, long-term investors can consider buying the stock as a secular, defensive play. Based on its prospects, this is an unexciting stock that has to weather some uncertainty in 2020-21.
Image Source: Twitter
Demand for electricity had dipped in April and I had reported it in The Lead-Lag Report and tweeted about it as well. Demand is still in no man's land and though EXC has issued a muted guidance for 2021, it admits that it is very difficult to predict how the COVID-19 situation will unfold.
Here are the reasons why I have rated the company as neutral:
Price Performance
Image Source: Seeking Alpha
The performance of EXC and its peers, which include FirstEnergy Corp. (FE), American Electric Power (AEP), and Entergy Corporation (ETR), over the short and medium-term, has been disappointing. However, the peer group - except EXC - has delivered steady gains and dividends for folks who have been holding the stocks for more than 3 years.
EXC's price has fallen 16% year-to-date and its dividend yield has bumped up to 3.99% as of June 1, 2020. Folks who have been holding the stock for 1 year are in a loss - however, EXC does have the potential to deliver decent gains over the long term as a defensive play.
COVID-19 Impact on EXC's Business
In EXC's Q1 2020 earnings call, the management team informed analysts that the stay-at-home orders had adversely impacted commercial and industrial loads. It expected this demand to decrease by 9-15% in 2020. However, a 4-7% increase in residential load in the same period would compensate to some extent.
EXC has responded by slashing its operating and maintenance budget by $250 million and cutting down capital investments by $125 million. Earnings guidance for the year 2020 was revised from $3-3.30 per share to $2.80-3.10 per share, which included COVID-19 bad debt.
The company admitted that the earnings guidance was based on the discussions it had with customers and by extrapolating scenarios on its business forecasting model. It added that the situation was evolving, thereby implying that the guidance could change depending on the circumstances. It is simple to understand that when states reopen, commercial demand will bump up a bit, but will fall if we are hit by a second COVID-19 wave.
It's an iffy situation and nothing can be done about it.
Another factor that EXC shareholders can track is the filing of rate cases (i.e., increase in rates) by the company in respective states. The company currently makes a gross margin of $2−4 per MWh and had filed rate increase cases before the COVID-19 disruption hit us. In a recent development, The Illinois Chamber of Commerce expressed its concern that EXC would use COVID-19 to push an increase in tariffs. Of course, EXC will defend itself by saying that this bailout will help preserve jobs. Whatever the outcome may be, investors should track the states' response to the company's rate hike requests.
Financials
EXC has a robust balance sheet, and since it provides a basic need, its revenue generation will remain steady. However, the company has been adding debt year over year. Between 2015 and 2019, it has issued $21.8 billion debt and repaid $12.67 debt, thereby adding a net $9.13 billion debt. EXC's short- and long-term debt has ballooned to $36.8 billion as of March 31, 2020.
Image Source: Seeking Alpha
Though the company generates very healthy operational cash flows ($6.7 billion for TTM 2020), it also has to fund for the decommissioning of its nuclear power plants. Hence, the company issues debt and common stock to pay dividends.
The company's profitability ratios also do not compare favorably with the sector's averages. The company is a sector-underperformer on most profitability metrics such as gross profit margin, EBITDA margin, net income margin, return on capital, and return on assets.
Image Source: Seeking Alpha
Summing Up
If there were no COVID-19 disruption and if EXC was priced at $40, I would have put a buy rating on it. However, the disruption is such that the company's prospects are uncertain.
What if EXC's rate hike requests are turned down? What if its COVID-19 bad debts balloon up further? What if the COVID-19 disruption prolongs, and a second wave sets in?
We have now begun witnessing protests across our nation, right in the middle of a pandemic, in the middle of a fragile economy. The only support we can fall back on is the Fed, which has said it will do whatever it takes to fix and repair businesses that need repairs.
So, here's my investment strategy for EXC:
(A) I would not buy the stock, neither for the short term nor for the long term, at its current price ($38.31 as of June 1, 2020).
(B) If the stock falls for some reason to about 60% of its current value, I would buy it for the short term to take advantage of a bounce.
(C) If I were a long-term investor, I would consider buying EXC after there is clarity on when the COVID-19 disruption would end. I also would benchmark it with growth stocks of the post-COVID-19 age before making a decision.
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This article was written by
Analyst’s 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.
This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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Comments (4)
au.finance.yahoo.com/...
long term chart shows the market has no interest in the company.
The company-specific risks are more interesting. Most importantly, will Exelon find a way to sell into the PJM capacity market from its nuclear plants? The FERC has basically set minimum pricing rules that don't allow EXC to take advantage of nuclear generation subsidies offered by the various states. Many of Exelon's nuke plants would not be economic to run if they can't sell into this market.
