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Exelon, A Radiant Comeback Story?

Posted on: September 29, 2008 - Email Article - Printable Version

TJ Smith

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Plain and simple, there is only one word that describes the decline of Exelon Corp [[EXC]. Wow. The largest utility company in the United States by market cap has seen its stock price depreciate nearly 17% and that includes a 625 basis point jump last Friday. The Wal-Mart of the utility sector, if you will, Exelon was seen as the poster company in the sector. Slow-growth, stable company, comfortable dividend. It had it all. So what happened?

The Skinny

Expectations are everything, especially on the street. On September 4, Exelon revised its full year guidance from $4.00 - $4.40 a share to $4.15 - $4.30 a share. While the tightening of their earnings range may seem to bring more transparency to investors, it was also slightly below the consensus of $4.36 a share. On that same day Exelon also announced a $1.5 billion share buyback to be completed within the next 6 months. In total, Exelon has $3.25 billion in buyback programs; however, that was not enough for Wall Street.

Reasons to Still Believe

Size Matters

While the negative connotation of missing expectations typically lingers a quarter or 2, there are numerous reasons why Exelon will return to form. For starters, they are massive. Through their consistent business model and customer development, Exelon has built itself into a virtual mainstay within the industry. With that size and development, Exelon has constructed the type of balance sheet that will once again be a catalyst for the company’s long-term growth. More specifically, despite economic hardship, Standard and Poor’s reaffirmed their positive outlook on Exelon. Through this reaffirmance, Exelon has been able to maintain its $7 billion line of credit that will assure long-term access to the capital markets that will be necessary for continued growth. This year alone, the company has successful raised $2 billion with plans to obtain another $1.25 billion next year already in the works. This capital structure also allows Exelon to successfully complete the aforementioned share repurchasing programs that they have announced this year. The $3.25 billion buybacks is favorable for consistent share price appreciation.

Regulatory Position

In addition to their strong financial position, Exelon historically has been very successful in terms of their regulatory environment. Currently, they are on paced to be in fully unregulated retail markets by 2011. This will give them full pricing power in Pennsylvania while subsequently improving their margins. The one downside to this regulatory position is it will take until 2010-2011 for significant revenue growth from Exelon. Current company projections have revenue growth of only about 0.1% from 2008 to 2009. Concurrently, revenue growth from 2010 to 2011 is projected at 20%. Obviously, Exelon in its size and regulatory relations is more of a long-term investment than a trader’s dream.

Generation Mix

Exelon is the leading nuclear electricity generator in the United States, accounting for 20% of the entire nation’s nuclear generation. Exelon’s 18 reactors make up nearly 70% of Exelon’s total generation profile. In total, the company generates approximately 25,000 megawatts of electricity a year with the remaining 30% coming predominately from fossil fuels. Nuclear energy has substantial prospects in an intermediary time frame. Whether a Democrat or Republican prove victorious in the presidential election, carbon cap legislation seems imminent. According to a report in the Wall Street Journal, carbon cap legislation could add up to $2 billion in annual revenue for Exelon because of their emission free nuclear fleet. While the consensus is not in love with nuclear energy, it will serve as a stepping stone until more viable renewable energy sources become a tangible factor in electricity production. Therefore, until other renewable sources legitimately add to the United State’s electricity infrastructure, Exelon should continue to reap the benefits of its extensive nuclear portfolio.

Valuation

Market Cap: $45B
Forward PE: 15.39x
Profit Margin: 14.27%
Operating Margin: 25.43%
ROE: 25.38%
ROA: 6.46%
Beta: .59

Conclusion

As can be seen, Exelon is built for the long run. Sub par guidance coupled with a bear market has pushed this stock to an unjustifiable level. This company is the definition of stability as it has all the qualities of a top flight utility. Its good financials, regulatory position and generating mix make it a premier company geared to provide long-term shareholder value.

-T.J. Smith

Disclosure: The mutual fund the author is associated with is long EXC.

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