The Perspective of Value Investors on Constellation Energy (CEG) Shares

Constellation Energy was one of the market's biggest losers today, losing 3.7% of its value and underperforming both the S&P500 and Dow Industrial composite indices by -0.0%. The large-cap Utilities company ended the day at $119.9, but is still well above its 52 week low of $71.16 and nearing its average target price of $122.08. Over the last 12 months, Constellation Energy is up 25.0%, and has outperformed the S&P 500 by 12.0%. The stock has an average analyst rating of buy.

Constellation Energy has a trailing 12 month price to earnings (P/E) ratio of 23.0, which corresponds to its share price divided by its trailing earnings per share (EPS) of $5.21. The company's forward P/E ratio is 18.2 based on its forward EPS of $6.58.

Earnings refer to the net income of the company from its sales operations, and the P/E ratio tells us how much investors are willing to pay for each dollar of these earnings. By way of comparison, the Utilities sector has historically had an average P/E ratio of 22.89. Whether the company's P/E ratio is within a high or low range tells us how investors are currently valuing the stock's earning potential, but it doesn't tell us how its price will move in the future.

Another metric for valuing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present value of the company if it sold all its tangible assets and paid off all debts today. Constellation Energy's P/B ratio of 3.28 indicates that the market may be overvaluing the company when compared to the average P/B ratio of the Utilities sector, which is 1.03.

To understand Constellation Energy's business, and therefore its attractiveness as a potential investment, we must analyze its margins in two steps. First, we look at its gross margins, which take into account only the direct cost of providing the product or service to the customer. This enables us to determine whether the company benefits from an advantageous market position:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023 26,455,000 24,963,000 6 200.0
2022 24,440,000 23,946,000 2 166.67
2021 19,649,000 20,196,000 -3 -400.0
2020 17,603,000 17,358,000 1
  • Average gross margins: 1.5 %
  • Average gross margins growth rate: 54.1 %
  • Coefficient of variability (lower numbers indicate more stability): 22480.0 %

Next, we consider the Constellation Energy's operating margins, which take into account overhead. This tells us whether the company's business model is fundamentally profitable or not:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023 26,455,000 24,963,000 9 350.0
2022 24,440,000 23,946,000 2 200.0
2021 19,649,000 20,196,000 -2 -140.0
2020 17,603,000 17,358,000 5
  • Average operating margins: 3.5 %
  • Average operating margins growth rate: 16.7 %
  • Coefficient of variability (lower numbers indicate more stability): 7173.3 %

Since both Constellation Energy's gross margins and operating margins tend to be positive, we know that its business is currently profitable. However, it's important to take into account their variability and overall growth trend to make a definitive conclusion regarding the company's strength.

Our final point of analysis is Constellation Energy's free cash flow. While earnings and margins are calculated on the basis of a company's delivered goods, they do not actually represent physical payments that flow into the coffers. The actually money that the company has -- minus its capital expenditures -- is reported as its free cash flow, which for Constellation Energy is as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 -4,541,000 2,334,000 -6,875,000 -70.09
2022 -2,353,000 1,689,000 -4,042,000 -51.56
2021 -1,338,000 1,329,000 -2,667,000 -129.32
2020 584,000 1,747,000 -1,163,000
  • Average free cash flow: $-6875000000
  • Average free cash flow growth rate: -55.9 %
  • Coefficient of variability (lower numbers indicating more stability): 64.7%

This is the pool of liquidity that the company can use to reinvest in its business and to pay its equity investors a dividend. Over the last twelve months investors in Constellation Energy have enjoyed a dividend yield of 0.8%, but with its negative recent cash flows, the company may not be able to keep this up.

In conclusion, Constellation Energy may be unattractive to investors with a low risk tolerance or a long term investment horizon. Stocks such as these may offer strong returns in the short term, but for now the long term potential of the company is not substantiated -- by the numbers, at least.

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.