-Exelon is the United States’s largest nuclear power provider, and also owns a variety of other energy related investments.
-Five year revenue growth: 4.2%
-Five year earnings growth: 7.5%
-Three year cash flow growth: 8.0%
-Dividend yield: 4.7% as of this writing
-The P/E is under 11 at the moment.
-I think Exelon would make a reasonable dividend investment under about $48 per share at this time.
Exelon derives revenue from three basic units:
Generation (nuclear and other energy source power production)
ComEd (purchasing and delivering electricity in Illinois)
PECO (purchasing and delivering electricity and natural gas in Pennsylvania)
Exelon (EXC) currently owns about 20% of the United States nuclear fleet. This makes EXC the largest nuclear owner/operator in the United States and the third largest in the world. Their nuclear operations are located in Illinois, Pennsylvania, and New Jersey. The Exelon Generation unit produces over 90% of its total power from its 10 nuclear plants. Exelon also operates with a variety of energy sources, including natural gas, coal, hydro, and wind.
The company has over 5.4 million electricity customers in Illinois and Pennsylvania, where it delivers power via ComEd and PECO. In addition, PECO serves nearly 500,000 residents with natural gas.
Revenue for Exelon is broken down nearly into thirds between Generation, ComEd, and PECO, making the company’s revenue stream rather diverse. Generation is the largest, followed by ComEd and PECO, but each one delivers a significant portion of the revenue.
Revenue, Earnings, Cash Flow, and Margins
Exelon has had irregular but solid growth in earnings, revenue, and cash flow over the past several years.
Exelon has managed to increase revenue by about 4.2% annually over the past five years. This takes into account their last two years of mediocre performance in the face of a harsh economy with reduced power consumption.
Earnings for Exelon have increased by approximately 7.5% annually over the past five years.
Cash Flow Growth
Cash flow growth for Exelon has been about 8% annually over the past 3 years. A notable cash flow increase in 2009 is a positive sign for the company that is not reflected in the earnings statements. Exelon generated some serious cash in 2009, but had higher depreciation and reduced receivables, payables, and inventory.
Exelon had a profit margin of nearly 16% for 2009, up from their five year average of under 13%.
In comparison, PPL, another large utility in Pennsylvania, had a 2009 profit margin of 6%, down from their five year average of 12%. Consolidated Edison, another utility, had a 2009 profit margin of 7%, which was also equal to their five year average. Southern Company had a 2009 and five year average profit margin of 11%
Exelon currently has a dividend yield of around 4.7%, which is well above average.
Exelon has grown their dividend by nearly 11% annually for the past 5 years.
Exelon did not raise their dividend in 2010, and it remains to be seen whether this will continue throughout the year. The company does have a sporadic dividend history, so it remains possible that Exelon will boost the dividend this year by a a small amount.
Exelon has a reasonable balance sheet. It has a bit more debt than I would like, but that’s common for utility companies as they require huge capital investments (massive start-up costs for projects). The company currently has a quick ratio of 1.00 and a LT debt/equity ratio of about 0.90. This is a reasonably leveraged company- has debt but not more than it can handle.
Exelon has identified 5 methods of growth:
1. Nuclear uprates- upgrading existing nuclear facilities to improve efficiency and output.
2. Power price recovery- increased cost of natural gas, coal, electricity, etc.
3. Climate change- Exelon stands to gain with any climate change legislation. (Whether such legislation is good or not is a political issue that I won’t get into, but the point is Exelon is one of the greenest energy producers out there and may increase in profitability with certain climate change legislation.)
4. Exelon Transmission Company- created in 2009 to reduce congestion, improve reliability, facilitate movement of energy, and mitigate oversupply.
5. Smart Grid- Exelon is investing to improve their delivery companies.
Exelon is on the front of renewable and green energy, yet is trading at a low valuation. The company runs the largest fleet of nuclear reactors in the US at a time when nuclear power is thought to be undergoing a resurgence. They also have a variety of transmission investments and other types of renewable power production.
In 2009, Exelon began constructing a 10MW solar power plant in Chicago which is currently 80% finished. This will power up to 1,500 homes. A variety of small to medium sized projects like this in solar, wind, and hydro energy allows Exelon to continue to diversify its energy portfolio.
According to the 2008 Electric Utility Cost Group (EEUG) Survey, Exelon provides the lowest production cost for nuclear power of any major nuclear company.
Basically here’s how I view the investment: You buy into a low-growth, but even more lowly valued premier energy company. As the economy picks up, revenue should increase once again along with the stock price, and you get a hefty 4.7% dividend yield while you wait. This alone would make Exelon a reasonable investment, but by investing you also get a potential bonus when it comes to climate change legislation. If Congress passes any sort of bill to benefit green energy companies, Exelon may receive a boost for the long run. So the downside is limited while the upside is unclear but potentially high.
Exelon faces several risks. Like all utilities, they face regulatory risks as they are well-entrenched businesses and require long-term price contracts. Exelon also faces political risk when it comes to energy sources, but in this area there seems to be way more upside potential than downside potential. They face risks from weather or other obstructions that could damage their generating or transmission abilities.
With nuclear reactors, there is always a small risk of a catastrophe. There are safeguards against nuclear failure but even in the instance of a well-contained problem, the hype and fear would likely drive the stock price down for some time.
Several months ago Exelon nearly bought NRG Energy but this was canceled by shareholders, showing that management may or may not have a clear focus for the future.
Conclusion and Valuation
Exelon has had mediocre performance over the past 2 years and is projected by analysts to have mediocre performance over the next 2 years as well. They’ve got pensions to cover while at the same time facing a mild reduction in energy usage over these years due to the weak economy. That doesn’t sound too good, until one sees that the valuation of the company is low. With a P/E of under 11, I feel that the market has taken this news into account and then some, meaning that I believe the company is a value at the moment. A premier nuclear company with diverse revenue streams has no business being at this low of a valuation in my opinion, especially if you look at the valuations of its competitors. Plenty of people love to buy when the news is great, but sometimes the best time to buy is when the news is not so rosy.
I’d like to see at least a small dividend increase, but at least at the current time the dividend looks well-covered by earnings and cash flow.
Exelon looks like a good place to put money away for the long term. I’m optimistic with a long view about the shares at the current time. I think the shares are a good value under $48. With Exelon, you get a premier energy company with a potentially nice upside if climate change legislation is passed at some point.
Full Disclosure: I do not own any shares of Exelon as of this writing.
You can see my portfolio here.
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