BUSINESS
Exelon Corporation, a utility services holding company, engages in the energy generation, delivery, and marketing businesses in the United States and Canada. It owns nuclear, fossil, wind, hydroelectric, biomass, and solar generating facilities. The company also sells electricity to wholesale and retail customers; and sells natural gas, renewable energy, and other energy-related products and services. Additionally, it is involved in the purchase and regulated retail sale of electricity and natural gas; and transmission and distribution of electricity, and distribution of natural gas to retail customers. Further, the company offers support services, including legal, human resources, information technology, financial, supply management, accounting, engineering, customer operations, distribution and transmission planning, asset management, system operations, and power procurement services.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to exceed the cost of capital, EXC is expected to continue to be an important Value Builder.
Exelon has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Exelon has a neutral Appreciation Score of 50 but a poor Power Rating of 29, and the Negative Value Trend Rating results.
Exelon’s stock is selling well below targeted value. The current stock price of $36.21 compares to targeted value 12 months forward of $46.
This neutral appreciation potential results in an appreciation score of 50 (50% of the universe has greater appreciation potential.)
Exelon has a Power Rating of 29. (This poor Power Rating indicates that Exelon only has a better chance of achieving attractive investment performance over the near to intermediate term than 29% of companies in the universe.)
Factors contributing to this poor Power Rating include: the Electric Services comparison group is currently in an unfavorable position; recent price action has been slightly unfavorable; and earnings estimate behavior for Exelon has been slightly negative recently.
INVESTMENT PROFILE
Exelon’s financial strength is poor. Financial strength rating is 5.
Relative to the S&P 500 Composite, Exelon Corp has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that EXC is higher risk. Low stock price volatility is a positive for Exelon. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high financial leverage, and low historical growth. Exelon’s valuation is low: high dividend yield, moderate P/E ratio, and low price/book ratio. EXC has normal market capitalization.
CURRENT SIGNALS
Exelon’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.
Exelon’s current technical position is very weak. The stock price is in a 22.4 month down move. The stock has declined 24.5% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
In light of this new information we are reviewing our current Overall Rating of D. This review will be completed in the next several days.
Exelon Corp (NASDAQ: EXC) has reported E.P.S. of $0.62 for its fourth fiscal quarter (ending December 31) versus $0.43 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $2.34 compared to $2.08 a year ago.
Exelon Corp (NASDAQ: EXC) stock closed at $36.21 on 2/21/24 after a large increase of 4.3%. Moreover, this advance was accompanied by above average trading volume at 135% of normal. Relative to the market the stock has been weak over the last nine months but has risen 5.3% during the last week.
CASH FLOW
In 2022, Exelon experienced a very significant reduction in cash of -$602 million (-38%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$6,676 million. Non-operating sources contributed +$564 million (+8% of EBITDA). Cash taxes consumed -$3,293 million (-49% of EBITDA). Withdrawal of investment from the business totaled +$11,819 million (+177% of EBITDA). On a net basis, debt investors withdrew -$4,665 million (-70% of EBITDA) while equity investors received -$11,703 million (-175% of EBITDA).
Exelon’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Exelon Peer Group as well. (Since 2020 Non-operating Income, %EBITDA has experienced very sharp improvement.) In most years, Exelon was in the lower quartile and top quartile. Currently, Exelon is substantially above median at +8% of EBITDA (+$564 million).
Exelon’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Exelon Peer Group. In most years, Exelon was in the top quartile and second quartile. Currently, Exelon is lower quartile at -49% of EBITDA (-$3,293 million).
Exelon’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Exelon Peer Group. In most years, Exelon was in the second quartile and top quartile. Currently, Exelon is upper quartile at +177% of EBITDA (+$11,819 million).
Exelon’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Exelon Peer Group. In most years, Exelon was in the third quartile and top quartile. Currently, Exelon is lower quartile at -70% of EBITDA (-$4,665 million).
Exelon’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Exelon Peer Group. In most years, Exelon was in the top quartile and lower quartile. Currently, Exelon is lower quartile at -175% of EBITDA (-$11,703 million).
Exelon’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Exelon Peer Group. In most years, Exelon was in the top quartile and lower quartile. Currently, Exelon is lower quartile at -9% of EBITDA (-$602 million).
Exelon’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by stability for the Exelon Peer Group. In most years, Exelon was in the top quartile and second quartile. Currently, Exelon is at the upper quartile at +5%.
PROFITABILITY
Exelon’s return on equity has been stable since 2013. The current level of 8.4% is 1.11X the low for the period and is -4.4% from the high.
This stability was due to strong negative trend in pretax operating return offset by strong positive trend in non-operating factors.
The productivity of Exelon’s assets declined over the full period 2013-2023: asset turnover has suffered a strong overall downtrend.
Additionally, pretax margin has exhibited little to no overall change but it experienced very sharp improvement from the 2021 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
Exelon’s return on equity is at the lower quartile (8.4%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at the lower quartile (2.4%) reflecting asset turnover that is at the lower quartile (0.21X) and at median pretax margin (11.5%).
Tax “keep” rate (income tax management) is at median (88.9%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is slightly above median (3.90X).
GROWTH RATES
Overall, Exelon’s growth rate has slowed considerably in recent years.
Exelon’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been -2.8% per year. (More recently it has been -12.0%.)
Total asset growth has been 1.1% per year.
Annual E.P.S. growth has been 0.7% per year.
Equity growth has been 0.7% per year.
Exelon’s consensus growth rate forecast (average of Wall Street analysts) is 6.2% — substantially above the average of the historical growth measures.
Relative to the Exelon Peer Group, Exelon’s historical growth measures are consistently lower quartile. Revenue growth (-2.8%) has been lower quartile. Total asset growth (1.1%) has been lower quartile. E.P.S. growth (0.7%) has been lower quartile. Equity growth (0.7%) has been lower quartile.
In contrast, consensus growth forecast (6.2%) is at median.
PRICE HISTORY
Over the full time period, Exelon’s stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, Exelon’s stock price fell -3%; relative to the market, this was a -69% loss. Significant price move during the period: 1) November, 2015 – April, 2019: +87%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -14.5% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of -14.5% is lower quartile relative to Exelon Corp Peer Group.
Current 5-year total return performance of 3.7% is substantially below median relative to the S&P 500 Composite.
Through January, 2024, with substantially below median current 5-year total return of 3.7% relative to S&P 500 Composite, Exelon’s total return performance is above median relative to Exelon Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, EXC’s overall valuation is low. The highest factor, the ratio of enterprise value/revenue, is slightly above median. Ratio of enterprise value/earnings before interest and taxes is at median. Price/earnings ratio is near the lower quartile. Ratio of enterprise value/assets is lower quartile. The lowest factor, the price/equity ratio, is lower quartile.
Relative to Exelon Peer Group, EXC’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is above median. Ratio of enterprise value/earnings before interest and taxes is at median. Price/earnings ratio is below median. Ratio of enterprise value/assets is near the lower quartile. The lowest factor, the price/equity ratio, is below median.
Exelon has a large value gap compared to the median. For EXC to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.77X to 3.57X. If EXC’s ratio of enterprise value/revenue were to fall to 3.57X, its stock price would be lower by $-4 to $32.
For EXC to achieve upper quartile valuation relative to the Exelon Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 3.77X to 4.32X. If EXC’s ratio of enterprise value/revenue were to rise to 4.32X, its stock price would increase by $12 from the current level of $36.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to exceed the cost of capital, EXC is expected to continue to be an important Value Builder.
Exelon’s current Price Target of $47 represents a +30% change from the current price of $36.21.
This neutral appreciation potential results in an appreciation score of 50 (50% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 50, the low Power Rating of 29 results in an Value Trend Rating of D.
Exelon’s current Price Target is $47 (-37% from the 2022 Target of $74 but +30% from the 02/21/24 price of $36.21). This dramatic fall in the Target is the result of a -20% decrease in the equity base and a -21% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has a very large negative impact.
PTR’s return on equity forecast is 12.6% — above our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2014 and 2022. The current forecast is above the 2019 peak of 9%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is well below the 2014 peak of 5%.
PTR’s cost of equity forecast is 5.5% — slightly above recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2014 and 2022. The current forecast is steady at the 2015 peak of 6.6%.
At Exelon’s current price of $36.21, investors are placing a negative value of $-50 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 6.8% versus a cost of equity of 2.3%.
PTR’s 2024 Price Target of $47 is based on these forecasts and reflects an estimated value of existing assets of $45 and a value of future investments of $1.
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