Electric Utilities company Exelon is standing out today, surging to $38.59 and marking a 3.0% change. In comparison, the S&P 500 moved only 0.4%. EXC is currently trading -11.67% below its average analyst target price of $43.69, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Exelon shares have outperformed the S&P 500 by 14.0%, with a price change of -2.0%.
Exelon Corporation, a utility services holding company, engages in the energy generation, delivery, and marketing businesses in the United States and Canada. The company is a utility, providing a public service and subject to extensive regulations. As stocks, utility companies are favored because they generally offer generous dividends, and their price usually demonstrates some resistance to market volatility.
On the other hand, these companies tend to accumulate large amounts of debt in order to fund their massive infrastructure investments, which makes their financial prospects highly sensitive to interest rate changes. Even small increases in interest rates can vastly increase their indebtedness. Another risk facing this sector is how it can adapt to new federal clean energy regulations and a shift towards renewables.
Exelon's trailing 12 month P/E ratio is 18.7, based on its trailing Eps of $2.06. The company has a forward P/E ratio of 16.4 according to its forward Eps of $2.36 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US utilities companies is 26.37, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
EXC’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Exelon, we obtain a PEG ratio of 2.67, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To gauge the health of Exelon's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
EXC's gross profit margins have averaged 28.9% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 0.4%.
Exelon's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 3,012,000,000.0 | -7,981,000,000.0 | -4,969,000,000.0 | -30.32 |
| 2020-12-31 | 4,235,000,000.0 | -8,048,000,000.0 | -3,813,000,000.0 | -505.24 |
| 2019-12-31 | 6,659,000,000.0 | -7,289,000,000.0 | -630,000,000.0 | -170.31 |
| 2018-12-31 | 8,644,000,000.0 | -7,748,000,000.0 | 896,000,000.0 | n/a |
- Average free cash flow: $-2,129,000,000.00
- Average free cash flown growth rate: -235.3 %
- Coefficient of variability (lower numbers indicating more stability): 128.1 %
The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. A negative cash flow is common, even among successful companies. But if EXC's free cash flow continues on its negative trend, it may not be able to sustain its dividend payments, which over the last 12 months has yielded 3.7% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Exelon's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1, so the company's assets may be overvalued compared to the average P/B ratio of the Utilities sector, which stands at 1.47 as of the third quarter of 2022.
Exelon is by most measures overvalued because it has a lower P/E ratio than the sector average, an average P/B ratio, and an irregular stream of negative cash flows with a downwards trend. The stock has mixed growth indicators because it has a an above average PEG ratio and consistently average gross margins. We hope you enjoyed this overview of EXC's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.
