I've heard a lot recently about EXC as an investment with good upside and a great dividend. However, looking at this stock and comparing with other utilities brings me to the question ... why has it under-performed? Other quality utilities are near their all-time highs as investors chase yield and drive up the shares. I've looked at some investor research and have not found a plausable answer for this under-performance. Why? The market does not allow true value without risk to remain ... it corrects the price.
Well it goes to show you that whether politics or the stock market no one can predict the future with any degree of reliability.
The only thing that is certain about the future is that it is unpredictible.
In the stock market you can pay up for the prospect of future growth or you can buy cheap based on market belief of poor future growth.
Given that forecasters are ususally wrong or better said -- provide no edge to investors for all their prognostications – it is clearly to our advantage to buy cheap.
On the cheap if the forecaster is wrong you have nice upside, if they rightly predicted poor future growth you are in at a fair value.
On the other hand if you buy handsomly based on forecasters rosy outlook and they are wrong you get killed. If they are right – well you merely justify the fat price you already paid.
If I have confused the issue it boils down to the simple adage that profits are more often made when the crop is planted than when it is harvested.
Buying cheap solves a multitude of sins.
I think the market consensus is that for the near term EXC has had it’s run. Maybe that is why the price is down. Could it go lower? Sure Mr. Market overracts both to the upside and the downside.
My money is that that overreaction to the downside has largely played out.
I appreciate the foregoing analyses and agree Exelon is a solid company. That said, I believe the same fact set that was viewed positively in the earlier postings also points to the downside issues holding the stock back.
In particular, as noted, Exelon generates roughly 2/3 of its income from power generation and they routinely hedge 95-100% of the current year, 75-90% one year out, and 65-70% two years out. Because of that, their 2009 and 2010 earnings were significantly impacted by power sold forward in 2007 and 2008 at very high prices (certainly much higher than the spot rates in 2009 and 2010). As such, the issue is not whether future power prices will be higher than current spot prices, but whether they will be higher than the 2007 and 2008 foward sales that drove 2009 and 2010 earnings. My guess is that they will be about 1/2 (high 30's to mid 40's). I have seen analyst estimates putting Exelon 2013 EPS well below $3.00. At a P/E of 14, you get a fair value of $42, about where it is.
For those seeking dividends, I would look at PM, especially on a pull back due to problems in Europe. I know I'm glad I did.
Tony, Jim Fink’s article from Investor’s Buiness Daily addresses your question of why underformance of stock price --
Part 1 of 3
Exelon: A Nuclear Power Utility in the Bargain Bin
By Jim Fink
Renewable energy remains a good bet, thanks to mandates in 38 states that require utilities to use more of it. Developers like Exelon Corp (NYSE: EXC) stand to win as low risk utilities with expertise.
-- Roger Conrad, Utility Forecaster
One of the surest ways to make money in the stock market is to isolate fundamentally strong businesses with sustainable dividends and wait.
You heard me right: don’t buy right away but simply wait until Mr. Market delivers up some irrational sell-off in the stock that transforms a reasonably-priced stock into a bargain-basement stock.
Value Investors Benefit from Time Arbitrage
Why does the market periodically provide such gifts to patient, long-term value investors? Simple; many institutional investors (e.g., mutual funds and hedge funds) are pressured by impatient clients to deliver short-term results quarter after quarter and dump any stock that shows momentary weakness. These funds are more interested in fly-by-night momentum stocks promising a quick 3% gain than companies with sustainable competitive advantages that offer the potential for doubling or tripling over then next three to five years.
Legendary investor Bill Miller calls this disconnect between short-term and long-term perspectives “time arbitrage.” Long-term value investors can take advantage of traders' short-term thinking for significant profits:
The advent of hedge funds has made the market highly informationally efficient in the short run. The result is an opportunity for ‘‘time arbitrage,’’ which means that by lengthening the time horizon for thinking about a company’s results three to five years out rather than one year out, you can increase the probability that you will outperform.
Put somewhat differently, in a market that’s informationally efficient in the short term, thinking three years ahead is likely to be more effective than thinking three to six months ahead. This assumes that the investor is fundamentally oriented, not technically oriented, where short-term price trends drive behavior.
A perfect example of time arbitrage occurred recently with Exelon (NYSE: EXC), a Chicago-based electric utility. On October 22nd, the company released third-quarter results that showed adjusted earnings up more than 15% and revenues up more than 21%. Furthermore, the company raised the lower-end of its full-year earnings guidance from $3.80 per share to $3.95.
Sounds good, right? It was, but the stock proceeded to drop more than 5% over the next couple of days because analysts had expected Exelon to earn $1.12 per share rather than the reported $1.11 per share. The company missed estimates by a penny per share because of slightly higher than expected depreciation and amortization expense (a non-cash item).
Does such a non-cash miss justify a 5% price decline in the stock? Absolutely not, yet value investors aren’t complaining; it was a great opportunity to pick up Exelon at a cheap, bargain price!
Exelon: A Nuclear Power Utility in the Bargain Bin
By Jim Fink
Investors Hope For a Change in Illinois' Governor
Another possible catalyst for Exelon involves improvements in its regulatory environment.
While Utility Forecaster's Roger Conrad says that Exelon "enjoys solid regulatory support in Pennsylvania," Illinois is a different story. The Illinois Commerce Commission (ICC) has been giving Exelon a hard time on some of its cost recovery requests. Illinois’ current Democratic governor Pat Quinn is anti-business and has supported the ICC’s tough stance. But polls show that Republican Bill Brady is likely to oust Quinn in the November election, and Brady is pro-business. University of Virginia professor Larry Sabato’s Crystal Ball website has the Illinois gubernatorial race “leaning Republican.” If Brady wins, look for Exelon’s cost recovery in Illinois to improve substantially by $100 million or more.
No doubt about it, Exelon’s future is bright. Prescient investors who have a long-term perspective will do extremely well owning Exelon stock and enjoy a 5% dividend waiting for the story to play out. As Exelon CEO John Rowe stated in the conference call:
The upside in future energy and capacity prices are clearly positive for Exelon and its long-term value. We don’t know exactly how much or exactly when; if we did, we would love to tell you; you don’t know exactly how much or exactly when. But we know and you know that this is the fleet that is best positioned to prosper in the second half of this decade. That is why our operating performance, our healthy balance sheet and the yield from our $2.10 per share dividend are all the more important now, simply put Exelon offers the best upside in our industry and a dividend yield of nearly 5% as we go forward.
Nuclear Power is the Future of Energy
Value investors don’t care about penny misses; they look at the big picture, the long term. And the long-term picture for Exelon is extremely bright. Exelon is not just your average, run-of-the-mill electric utility. It is the NUMBER ONE provider of nuclear energy in the United States with a 20% market share. Nuclear power runs on uranium, a relatively inexpensive and abundant fuel source compared to fossil fuels like oil and natural gas. According to one expert, there is enough uranium in the earth’s crust to power the world’s electricity needs for 160,000 years, which is a heckuva lot longer than current supplies of oil (50 years), natural gas (100 years) and coal (500 years) are expected to last.
Regarding supply, no new nuclear power plants have been built in the United States since the 1970s, so Exelon’s 11 fully-licensed and operational nuclear power plants are precious commodities that give the company a virtually unassailable competitive advantage. Combine this limited supply with strong support from the Obama administration for nuclear energy, and Exelon is well positioned for the future.