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Utilities | Stock Recommendation

Utilities | Stock Recommendation. 03.09.2010. Nihar Shah Michael Song. Recommendation. Decrease weight in SIM portfolio by 73 bps Final: Underweight 151 bps Total weight of SIM: 200 bps. Introduction. Utilities Sector Size: 1721.2B Industries. S&P/SIM Weight. (.78)%.

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Utilities | Stock Recommendation

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  1. Utilities|Stock Recommendation 03.09.2010 Nihar Shah Michael Song

  2. Recommendation • Decrease weight in SIM portfolio by 73 bps • Final: Underweight 151 bps • Total weight of SIM: 200 bps

  3. Introduction • Utilities Sector • Size: 1721.2B • Industries

  4. S&P/SIM Weight (.78)%

  5. S&P/Sector Performance (YTD) Outperform

  6. Exelon Corp (EXC) • Exelon is a diversified utility company which operates through three subsidiaries: Generation, PECO, and ComEd • Generation consists of owned and contracted electric generating facilities with 24,850 MW of capacity, of which 17,009 MW (68.5%) is nuclear • ComEd delivers energy to retail customers in northern Illinois

  7. Exelon Corp (EXC) Multiples Valuation:

  8. Exelon Corp (EXC) Terminal Discount Rate: 9.0% Terminal FCF Growth: 3.0%

  9. Exelon Corp (EXC) • Valuation • Current Price: $45.50 • Target Price: $48.06 • Upside: 5.6% • Dividend Yield: $2.10 / 4.6% • $30.1 Billion • Recommendation: Sell 100% Sensitivity Analysis:

  10. Public Service Enterprise Group (PEG) • PEG is a diversified utility company with operations primarily in the Northeastern and Mid-Atlantic United States • 3 Primary Businesses (% of total revenue): • Power (74.7%) - Selling electricity, natural gas, capacity, and emissions credits under contract or on spot market • PSE&G (20.4%) - Provides electric transmission and electric and gas distribution to residential, commercial and industrial customers in New Jersey. Currently increasing level of renewable generation • Energy Holdings (4.5%) - Manages leveraged lease investments and operates domestic generation projects. Also pursuing solar and other renewable generation projects.

  11. PEG/S&P Performance (5 year)

  12. Relative Multiple Valuation

  13. Absolute Valuation

  14. PEG • Valuation (Weighted): $37.27 • .3 DCF + .3 P/FE + .1 P/B + .1 P/S +.1 P/CF + .1 P/EBITDA • Current Price: $31.2 • Upside: 19.5% • Yield: 4.4% • $15.5 Billion • DCF: Discount Rate = 9%, Pgrowth = 5% • Recommendation: Buy 200 BPS

  15. AEP • Current Price: $34.21 • Valuation (Weighted): $36.17 • .3 DCF + .3 P/FE + .1 P/B + .1 P/S +.1 P/CF + .1 P/EBITDA • Upside: 7.1% • Yield: 4.9%

  16. Questions?

  17. Old Slides

  18. Utilities – Catalysts/Risks • Catalysts • Rate Regulation Increase • Weather Patterns • Improvement in Economy • Green Policy (Nuclear/Water) • Risks • Rate Regulation Neutral/Decrease • Inconsistent or over-demand • Commodity Prices • Green Policy (Electric/Diversified/Gas)

  19. Largest Companies in (SPUT)

  20. Business Analysis Electric Foreign Diversified Gas Water

  21. Industry vs Sector Performance

  22. Sector vs S&P Performance Correlation: 80.93% Outperform Outperform

  23. Economic Analysis

  24. Economic Analysis

  25. Economic Analysis Forecast: GDP will very slowly increase over the short term

  26. Economic Analysis

  27. Economic Analysis Forecast: Interest Rate will increase in the short term

  28. Economic Analysis

  29. Economic Analysis

  30. Economic Analysis Forecast: Natural Gas Price will stay relatively constant in the short term

  31. Economic Analysis

  32. Economic Analysis Forecast: Potential for long term growth

  33. Regulation • State commissions are responsible for determining utilities’ proper rate bases and allowable operating expenses. Individual states’ rulings often differ with regard to these determinations. They also differ in allowed accounting treatments for depreciation accruals and investment tax credits. Although rulings are often presumed to be based solely on the public interest, commissions actually seek to provide a balance between investor and consumer interests.

  34. Green Policy (Update) • On June 26, 2009, the House of Representatives passed, by a narrow 217–205 margin, its version of a new energy bill, H.R. 2454. Included in the bill, called the American Clean Energy and Security Act, 2005–2050, were provisions for a cap-and-trade system that would incrementally reduce GHG emissions, beginning with a cap on 2012 emissions that is 3% below 2005 levels. The bill, whose principal sponsor was Henry Waxman (D.–California), also included a requirement that utilities get 15% of their electricity from renewable energy sources and, through increasing their energy efficiencies, reduce their electricity use 5% by 2020. Individual states, however, would be allowed to vary these two percentages as long as the total came to 20%.

  35. Financial Analysis Sector

  36. Financial Analysis

  37. Margins Net Profit N/A

  38. Summary Overall: Slightly negative for short term

  39. Recommendation • Decrease weight in SIM portfolio by 72 bps • Final: Underweight 150 bps

  40. Questions

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