FPL Group, Blowing Off 2008
Posted on: January 13, 2009 - Email Article - Printable Version
As the misery that was 2008 comes to its long and tumultuous close, investors should be gearing up for a 2009 year that will hopefully bring a turn around. While no money manager or financial guru possesses the ability to time the market’s comeback precisely, we all must have a plan of action for when that time comes. Investors should have their eye on beaten down equities that have maintained long term value and strong fundamentals. We are accustomed to hearing this type of preaching, but taking action is much easier said than done. These should be the stocks that outpace the market on the upside as the aftermath of the current recession subsides.
In the utilities sector, a stock that fits the aforementioned profile is the Florida Power and Light Group [FPL: 0.00, N/A (N/A)]. FPL engages in the generation, transmission, and distribution of electricity in South Florida, serving over 8.7 million customers in the region. The company has two main business units, Florida Power and Light and FPL Energy. Florida Power and Light is the company’s regulated electric utility entity servicing over 4.5 million customers with 22,115 megawatts in operation. In addition, Florida Power and Light accounts for 77% of FPL’s top line. FPL Energy is the United States’ leader in renewable generation, primarily wind, with 16,128 megawatts in operation and approximately $16.5 billion in assets.
While FPL is one of the ten largest publicly traded utilities companies, boasting a market cap over $20 billion, it has also been one of the most beaten down equities. FPL will finish 2008 down over 24%, anything but the “safe-haven” a utility company is supposed to be.
However, the company’s short term decline is justifiable in many regards, but it will prove to only be short term. The main catalyst to be considered before investing in any utilities companies is location. The strength of the economies that the utility company provides 
electricity and power services to is vital for demand levels and thus profitability. Florida, particularly the southern region, has been the poster child for subprime mortgages and a horrific housing market. An area riddled with foreclosures and vacancies is not exactly craving the type of electricity demand FPL had been accustom too. Therefore, it comes as no surprise that the company has faced its fair share of difficulties in 2008.
That being said, finance is a forward looking science as markets are priced on future expectations, not current scenarios. This can be difficult to remember at times, but it is one of the keys to successful investing. FPL is a mainstay in utilities sector, with the size and scope to hang on during these tough times and more importantly the long-term drivers to once again bring prosperous returns to smart investors.
For starters, FPL has a superb balance sheet that will serve as the framework for their longevity and growth. FPL is one of only three companies in the power generation sub sector to boast an “A” credit rating whereas over 65% of the power generators carry a “BBB” rating or worse. They have maintained these rating with a temperate and strategic debt policy, as well as a strong managerial approach to their capital expenditures. In addition, FPL has the second largest credit facility in the entire utilities industry, behind Exelon Corporation [EXC: 41.65, -0.01 (-0.02%)]. This credit facility contains over 38 banks, limiting their counterparty exposure. Furthermore, 93% of their counterparty exposure is with companies with investment grade credit ratings, an outstanding figure in today’s markets. Finally, the company has 70% of its 2009 estimated EBITDA locked up in long-term or regulated contracts, allowing a foresight in cash flows that will guide capital expenditures going forward.
Along with their industry leading balance sheet, FPL has a responsible and knowledgeable management team that has proven to be in touch with the economic times. For example, on October 27, 2008, the company announced a $1.7 billion capital expenditure cut from $7 billion on its wind programs because they wanted to limit company exposure to the squandering debt markets. While their wind program is their largest growth catalyst, the company’s conservative nature should allow them to expand their wind operations further in the future than if they were to maintain their capital expenditures levels in this market.
As far as their wind operation go, FPL currently has over 6,300 megawatts of capacity. Their wind pipeline, however, is even more impressive. In 2008, the company added 1,300 megawatts and plans to develop an additional 1,100 megawatts in 2009. In total, the company projects a wind portfolio of 31,000 megawatts by the year 2013 and beyond. With the green movement at full speed and a pending Barack Obama presidency, FPL’s initiatives should prove to be successful and beneficial to the community, stakeholders, and most importantly investors.
With all that said, what should an investor look for before diving into this beaten down equity? Obviously, key indicators related to the Florida’s housing market have to be heavily considered before jumping on board with FPL. Some key statistics include the school enrollment figures in South Florida as well as the net inflows of new businesses. In addition, investors should stay wary of the OFHEO and Case-Shiller Housing Price Index before making this investment. All in all, FPL is in a prime position for a turnaround in the United States economy. The company has the makeup of a leading power player in the sector for years to come. Do not let this opportunity be gone with the wind.
- TJ Smith
Disclosure: None
The Following Stocks Were Mentioned In This Article: FPL
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