Weekly Stock Call

January 31, 2011
Current Price – US$42.56

Exelon Corporation (EXC) is an energy and utility holding company with annual revenues of US$18.6B from operations predominately in the Midwest and Mid-Atlantic US. The company’s earnings are primarily a function of weather conditions, levels of economic activity, supply pricing and competitive rivalry. Lower levels of economic activity in the US in recent years have hampered earnings, but longer term drivers point to a return to demand growth for energy in EXC’s markets. Specifically, the regulatory push to lower airborne industrial emissions should benefit the company with cost advantages as 93% of its power is nuclear generated and the gradual return of manufacturing to the US (as costs rise abroad) should yield an increase in energy demand and fuel market price increases. In the near term, lower natural gas prices may lead to reduced revenue growth for nuclear energy producers, however the current dividend makes waiting for a return to higher revenues (and the associated stock price increase) more tolerable. At current price EXC has a 4.9% dividend yield and is trading at a modest discount to historic valuation ratios suggesting that it would be a good candidate to provide a revenue component with some potential for equity growth to a diversified portfolio. I stress diversification with respect to EXC because, while the likelihood of catastrophic failure of one of the company’s facilities is slim, the financial consequences of such a failure could be immense. 


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount method and historical and industry price ratios) I arrive at a current valuation for Exelon Corporation of US$48.46

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       13.9%
Dividend yield   4.9%
Total return     18.8%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Environmental regulation – the company is subject to various Federal and State regulation and as such may be incur material adverse earning impacts in maintaining compliance.

Price and availability of raw materials – impacts both competitive market pricing of electricity and generation costs and changes in these factors can thus impact earnings.

Weather and general economic conditions – are primary determinants of demand. Unusually mild weather conditions or subdued economic conditions can reduce both demand and margins putting pressure on earnings.

Catastrophic failures – at any of the company’s facilities could have major negative impact on the continued operational viability of the company.

Interest rate risk – As the company carries significant levels of debt, increased financing costs could have adverse impacts on earnings.


The Numbers

Share Price ($US)   42.56 
Market Cap ($US B)   27.8 
No. Shares (M)   663 
ROE   19.8%
ROA   5.2%
P/E Ratio   10.8
Price/Sales Ratio   1.5
Price/Book Ratio   2.0
Current Ratio   1.7
Interest Coverage   9.0
Total Debt/Equity   93.0%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

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