EXC

Is the Bullish Sentiment on Exelon (EXC) Justified?


With an average analyst rating of buy, Exelon is clearly an analyst favorite. But the analysts could be wrong. Is EXC overvalued at today's price of $40.24? Let's take a closer look at the fundamentals to find out.

The most common valuation metric for stocks is the trailing price to earnings (P/E) ratio. Exelon has a P/E ratio of 18.8 based on its 12 month trailing earnings per share of $2.14. Considering its future earnings estimates of $2.5 per share, the stock's forward P/E ratio is 16.1. In comparison, the average P/E ratio of the Utilities sector is 22.89 and the average P/E ratio of the S&P 500 is 15.97.

Exelon's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 2.509 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not justified by its growth levels.

We can also compare the ratio of Exelon's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present liquidation value -- or what would be left if the company sold off all its assets and paid off all of its debts today. EXC has a P/B ratio of 1.731, with any figure close to or below one indicating a potentially undervalued company.

Now we turn to the actual cash that Exelon has on hand after all of its inflows and outflows of capital have been accounted for -- including non business related items such as the cost of maintaining its debt. This final bottom line is called levered free cash flow, and for Exelon it stands at -$. This negative cash flow could mean the company may not be able to sustain its 3.67% dividend for much longer.

With most indicators pointing at a higher than average valuation with uncertain growth prospects, most analysts are either wrong about Exelon, or their research has uncovered one or more qualitative reasons to invest in the stock. For example, the strength of the management team and their plan for executing the business strategy may have convinced some analysts to give less weight to traditional quantitative factors.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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