Independent market research for the future investor.

(Michael Li – UCL , Olivia Pote, Michael Li -University of Bath)

As the largest nuclear power plant owner in the United States, Exelon has suffered as low natural gas prices have slashed power prices since 2008. Recent developments which have caused cheap gas prices will remain an advantage for competing generators and pressure nuclear plant returns for the foreseeable future.

Exelon has however shown that it is politically capable, winning price subsidies in Illinois, New York, and New Jersey to keep most of its nuclear fleet running. Exelon is seeking additional subsidies for the four nuclear facilities not receiving zero emissions credits in Illinois, however negative economic headwinds from COVID-19 will make it difficult to attain further support in the short term.

Valuation

Calendar	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Current	5-Yr
Price/Sales	1.48	1.48	1.04	0.94	1.21	0.81	1.09	1.12	1.23	1.27	1.10	1.12
Price/Earnings	10.76	11.95	20.94	14.65	15.20	12.40	26.89	17.67	11.65	19.24	14.15	17.25
Price/Cash Flow	5.26	7.12	3.97	3.96	5.72	3.76	3.53	5.48	5.15	6.01	5.52	4.81
Price/Book	2.03	2.00	1.19	1.07	1.35	0.99	1.26	1.35	1.41	1.39	1.14	1.30
Forward Price/Earnings	10.14	14.22	10.05	10.28	14.79	11.01	13.50	13.64	14.29	14.90	12.77	13.65
PEG Ratio	1.69	11.75	3.99	1.48	1.23	1.12	2.77	2.03	1.73	3.91	8.63	2.85
Earnings Yield %	9.29	8.37	4.77	6.83	6.58	8.07	3.72	5.66	8.58	5.20	7.07	6.41
Enterprise Value (Bil)	38.78	42.17	43.54	42.26	51.60	45.04	66.92	72.63	78.25	80.08	75.51	69.63
Enterprise Value/EBIT	8.21	9.29	15.97	10.90	12.45	11.32	18.50	16.23	15.75	17.28	17.12	16.08
Enterprise Value/EBITDA	5.70	6.08	6.40	5.36	6.50	5.69	7.71	7.23	7.17	7.64	7.47	7.21

From the table we can see that forward Price/Earnings (P/E) ratios are consistently lower in relation to Price/Earnings (P/E) ratios year-on-year, barring 2011 and 2018. The ratios for forward P/E are calculated by dividing current share prices by the projected earnings per share in the future, whilst the P/E ratio is calculated by dividing current share prices by the current earnings per share, essentially showing how much investors must pay for a $1 return. This trend therefore gives us confidence that Exelon has the potential for long term future growth, although it should be noted that projected earnings are subject to personal bias and inaccuracies meaning it should not be the only indicator that is looked at. Further comparing Exelon’s P/E figures to competitors such as First Energy (37.4x) and the Electric Utilities industry average (19.7x) indicates the company is relatively undervalued in comparison as investors pay considerably less for the same return of shares.

Looking at past trends over the last 10 years we can see that nominal Enterprise value (EV) as well as key ratios such as Enterprise Value/EBIT and Enterprise Value/EBITDA are showing healthy growth. EV figures offer a holistic view of the overall state of a company by considering its market capitalisation, cash from current balance sheets as well as both short- and long-term debt. This gives investors increased insight beyond simply the revenue generated by considering liabilities and whether this changes the overall condition of the company. Examining Exelon’s assets to liabilities indicates that in the short-term assets ($12.5B) will cover short term liabilities ($11.8B) however will not cover long term liabilities ($78.3B). Breaking this down it becomes evident that Exelon’s Debt coverage is weak since operating cash flow covers only 17.4% of debt whilst its interest payments are also not well covered by EBIT (2.7x coverage). This indicates exactly why face value figures are insufficient to determine the whole picture as its long term makes the company vulnerable to shocks such as the Covid-19 pandemic where the energy sector has seen a 31% decrease in consumer demand. In addition, over the last 10 years the company’s dividend payments to shareholders have been highly volatile suggesting management issues could occur in the future affecting the share price of the company which has slumped 23.8% in the last year.

However, the current 2020 Price/Earnings ratio of 14.15 remains less than half the projected industry wide Price/Earnings ratio for the Utilities sector of 39.18 and in past 90 days share prices have started to bounce back showing a 14.4% growth, higher than the industry average of 10.6%. This combined with a price to book ratio of 1.14 in comparison to the industry average rate of 1.91 further indicates Exelon’s modest share value as of 2020.

According to HSBC analysts due to the pandemic low interest rates will be the way for the foreseeable future making it possible for Exelon to deploy additional capital into new assets. Furthermore, indicators from markets and investors show an increased awareness towards the environment as demand for greener investment, greener energy and de-carbonisation are on the up highlighting a potential new direction for the energy industry that would favour a nuclear-electric giant such as Exelon.

Overall, despite the turbulent year for the industry and issues such as a high debt to equities ratio for Exelon, given expectations of strong rebounds are high and a new greener incentive is on the rise globally, we at Orchid Global Markets thereby issues a BUY rating for NASDAQ-EXC and concludes that the current stock price is UNDERVALUED.