Utilities were burned at the stake in September as security trading unfolded amid rising interest rates. However, this decision did not change the sector’s valuation situation too much.
One of its components, Exelon (NASDAQ: EXC), has a sub-sector PEG ratio, but is the stock a buy here after a slump in the third quarter? Let’s shed some light on the situation.
S&P 500 price-earnings-growth (PEG) ratios: EXC a bit cheap
According to Fidelity Investments, Exelon Corp, a utility holding company, is engaged in the generation, delivery and marketing of energy in the United States and Canada. It has nuclear, fossil, wind, hydroelectric, biomass and solar power plants. The company also sells electricity to wholesale and retail customers; and sells natural gas, renewable energy and other energy-related products and services.
The Illinois-based, $37.8 billion market cap electric utility company trades at a near-market GAAP price-to-earnings ratio of 17.6 and pays a yield in dividends of 3.5%, according to The Wall Street Journal.
Exelon has surprisingly strong EPS growth in the range of 6% to 8%, per BofA, as well as a solid dividend yield. While many utilities are trading at a high earnings multiple on both an absolute and relative basis, EXC is currently exiting from a lower valuation basis, trading at a slight discount to its peers.
After divesting its merchant electricity business, there is some uncertainty as to how its earnings profile will evolve in the coming years. With many companies in the utilities sector, adverse regulatory and legislative changes can pose a risk to earnings. It is also essential that Exelon executes investment plans correctly given today’s much higher cost of capital. Storms and natural disasters always present risks for these capital-intensive companies and changing tax rates can be problematic.
The company beat revenue estimates in its third-quarter report earlier this month, and stocks generally rose, but the move was not abrupt. It has cut its operating profit for the year 2022, so there is more certainty there.
On valuation, BofA analysts are forecasting a solid 10% increase in earnings this year, while earnings per share growth in 2023 is expected to be just 3%. The Bloomberg Consensus Forecast is roughly in line with what BofA expects, including a rebound in 2024 with EPS growth of 8%.
Dividends, meanwhile, are expected to rebound over the next two years after EXC spun off its merchant power company. The stock trades at a high EV/EBITDA multiple and has negative free cash flow (which is quite common in the industry). Seeking Alpha reviews Exelon with a decent price tag B- Valuationbetter than some of its peers.
Exelon: earnings, valuation, dividend forecasts
Looking ahead, corporate events data provided by Wall Street Horizon points to an unconfirmed fourth quarter 2022 earnings date of Friday, February 24. Before that, however, the leadership team is expected to speak at the Wells Fargo Midstream and Utilities Symposium 2022 on December 7-8. . Industry news is often released at these events, so investors should be careful of what EXC might divulge.
Corporate Events Calendar
The technical grip
I was bullish on EXC earlier this year, but it wasn’t the right call. I noted a few price levels to watch on the downside, and stocks fell throughout those. It is therefore important to analyze the stock now with fresh eyes. I see resistance near $40 while $35-$36 is support. Note, however, that EXC’s RSI at the top of the chart rises as the stock consolidates – this is a bullish feature, but eventually the price needs to climb above $40 before it appears. technically bullish.
A move above $40 would trigger a price target near $45 based on the current $35-$40 range.
EXC: Support for stocks below $40, but bullish RSI trends
I generally continue to like EXC’s valuation and yield, but there is now some technical work that needs to be done by the bulls to create a more favorable outlook.