Two Minute Drill - “I like to be able to give a two-minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.” Peter Lynch
Exelon is a large utility services holding company. Exelon generates and delivers energy to over 6.6M customers. Their principal markets are Northern Illinois (including Chicago), southeastern Pennsylvania (including Philadelphia) and central Maryland (including Baltimore).
The generation of energy is resourced by approximately 52% nuclear, 37% fossil and 11% renewable.
If we bring down F2013 earnings to $2.20 per share, using a share price of $30.40, you get a P/E of 13.82. This is using depressed earnings, and not looking towards 2014. Much of this investment is based on a lower than typical P/E, or at least an arguably fair P/E. If earnings rebound to $2.70 in F2014, the P/E at today’s closing price would be 11.26.
Because they have such a high nuclear generation, their costs are relatively fixed, yet the rates they can charge are based on the price of natural gas. Natural gas has been in a depression, and currently is priced at $3.77 per unit. During 2006, the price of natural gas was in excess of $10 per unit, and it went under $3.00 per unit during 2012.
A constant moderate rise in natural gas prices would be operationally positive for Exelon. Of course falling prices would have the opposite affect.
The company carries the inherent risk of any utility, as well as the risks of a potentially negative nuclear situation. The company carries a lot of debt, and if their credit rating went below investment grade, that could be detrimental to the investment and thesis.