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Morgan Stanley: Exelon Is 'Too Cheap To Ignore'

Jayson Derrick

Shares of electricity and natural gas provider Exelon Corporation (NYSE: EXC) have underperformed peers by more than 15% since the start of 2019, and investors should buy the dip, according to Morgan Stanley.

The Analyst

Stephen Byrd upgraded Exelon from Equal-weight to Overweight with a price target lifted from $56 to $60.

The Thesis

Exelon continues to face multiple headwinds, especially in the form of a broader federal investigation into utility lobbying activity in Illinois, Byrd said in a Tuesday upgrade note. (See his track record here.)

The stock is now trading at a level that is "too cheap to ignore" in light of the following, the analyst said:

  • Large free cash flow.
  • Margin stability from contracted payment streams.
  • The potential for higher EBITDA and greater stability from legislation in Illinois that could add $4 per share in value.

From a valuation perspective, the company's core utilities business is worth $42 per share, and this implies that at current levels, the ExGen merchant power business is valued at $3 per share, Byrd said.

A more realistic valuation is $18 per share, as the business should generate close to $7 billion in unlevered free cash flow through 2022, he said. 

Exelon stock offers a potential 32% return along with a 3.2% dividend yield, which implies a "highly attractive" risk-reward profile, according to Morgan Stanley. 

Price Action

Exelon shares were up 2.2% at $46.69 at the time of publication Tuesday. 

Related Links:

Goldman Upgrades Exelon, Says It's Otherwise Cautious On Energy Group

Wells Fargo Turns Bullish On Exelon, Cites Legislative Tailwinds For Nuclear Energy

Photo by Fletcher6 via Wikimedia. 

Latest Ratings for EXC

Date Firm Action From To
Aug 2019 Upgrades Equal-Weight Overweight
Aug 2019 Maintains Equal-Weight
Aug 2019 Upgrades Equal-Weight Overweight

View More Analyst Ratings for EXC
View the Latest Analyst Ratings

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