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$EXC 2018-08-11 : Transcripts- Edited Transcript of EXC earnings conference call

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Q2 2018 Exelon Corp Earnings Call

CHICAGO Aug 12, 2018 (Thomson StreetEvents) — Edited Transcript of Exelon Corp earnings conference call or presentation Thursday, August 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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EARNING UPDATE $EXC Exelon Corporation for quarter ending q_Jun18 – Revenue grew, Margins expanded

[s2If !current_user_can(access_s2member_level0)]Please login to read the earning update on EXC [lwa][/s2If][s2If current_user_can(access_s2member_level0)]Exelon Corporation reported earnings (EPS) of 0.56 per share for the quarter ending q_Jun18. This is vis-vis 0.60 per share for the previous quarter ending q_Mar18, a decline of 6.7 %. Compared to last year same quarter (q_Jun17), earnings grew…

Summary

The strong rally in utilities will continue into 2015, despite statements to the contrary from analysts, as the sector is still strongly undervalued relative to the market.

Exelon combines an attractive valuation with strong price momentum and EPS growth.

We expect the stock to outperform the market by 8.7% over the next 12 months.

Entergy Corporation, Hawaiian Electric, and Westar Energy are other electric utilities that look poised to outperform the market in 2015.

A) Introduction

The Utilities sector surprised many by posting the best price performance in the market in 2014. Electric utility companies were a particularly strong subset of the sector, posting an average gain of 31% during the course of the year. At this point, many investors are questioning whether the current rally will continue, especially with rising interest rates on the horizon (high interest rates hurt utilities). On Wednesday, Michael Purves, the head of equity derivatives research at Weeden & Co, advised investors to "start to take profits given the run is getting long in the teeth." Contrary to common sentiment, we feel the sector's momentum and growth should serve a signal of further outperformance, as the sector is still strongly undervalued relative to the overall market.

Investors unfamiliar to our style of analysis should know that we solely look at metrics that have a long historical track record of predicting stock returns. We'll first analyze how the overall Utility sector stacks up to the other nine sectors in ten metrics that have been academically shown to predict returns. Then, we'll look into which stocks within the Electrical Utility industry group look poised to lead the group, again looking at value, momentum, and earnings.

B) Top-Down Analysis of the Utility Sector

In deciding whether to invest in certain utility stocks, it is critical to first look at how the overall sector stacks up relative to other sectors in value, momentum, and growth. The table below shows how the sector compares to other sectors in five valuation metrics that have been academically proven to predict returns:

The utilities sector looks the most attractive of any of the sectors on a book value basis, with the sector's average price/book ratio of 2.22 being the lowest of any of the sectors. The sector looks relatively attractive on both a revenue and earnings basis, with a sales yield of 49% and earnings yield of 3.6%. Even with the big rally, the average utility stock pays a 3.4% dividend, good for third behind the Energy and Telecom sectors. Undervalued stocks tend to outperform the market, and using the average amount of excess return generated by these factors historically, our algorithms estimate how much. Overall, we expect the average utility stock to generate 1.31% of alpha attributable to value, over the next twelve months. Next, we analyze how the sector is doing on a growth & momentum basis:

As we said before, the utility sector has performed the best over the last twelve months, gaining 25% on average. It is the second best performing sector over the last six months, behind the Health Care sector, gaining a shade under 9%. The sector falls in the middle of the pack in average annual EPS growth, growing 18%. The sector is also in the middle of the pack in financial efficiency, returning an average of 2.8% on assets and 9.8% on equity. Each of these five metrics has been academically shown to predict stock returns, with the two price momentum metrics being the most important. Overall, we expect the average utility stock to generate 1.33% of alpha attributable to growth over the upcoming twelve months.

C) Group Leaders

Now that we've analyzed the sector on a top-down basis, we'll now look at which stocks within the electric utility industry group look poised to lead the group. Below is a table showing which stocks in the group are the most undervalued:

As we can see, our top five most undervalued electrical utilities include Entergy Corporation (NYSE:ETR), Exelon Corporation (NYSE:EXC), Portland General Electric Company (NYSE:POR), American Electric Power Co. (NYSE:AEP), and Westar Energy (NYSE:WR). Each of these companies has a sales yield (inverse of Price/Sales) over 45%, which is way above the overall market average. Each of these stocks sport similar earnings and dividend yields, each of which are again much higher than the overall market averages. These stocks also look attractive on a book value basis, with none of the company's having a price/book ratio over 2. Overall, Entergy tops out as the value leader of the group, with our algorithms expecting the stock to generate 5.8% of value alpha over the next twelve months. With that being said, each of the five stocks is expected to significantly outperform the market due to their attractive value. Next, we'll see which stocks are leading the sector in growth and momentum:

As we can see, our top five strongest growth electrical utilities include ITC Holdings Corp. (NYSE:ITC), Hawaiian Electric Industries (NYSE:HE), MGE Energy (NASDAQ:MGEE), Northeast Utilities (NYSE:NU), and Exelon Corporation. After a slow start to the year, Hawaiian has had a very strong second half of the year (+40%). Exelon has been the best performer over the past year, gaining 44%. Exelon has also had the strong EPS growth of the five, growing annual EPS by 41%. ITC Holdings tops the group in profit efficiency, returning 5.2% on assets and 21% on equity. Overall, ITC is expected to outperform the market the most owing to its growth profile over the upcoming twelve months (4.76%). Exelon is the only stock that made it onto both group leaders lists. Next, we'll look at which stocks have been performing best relative analyst earnings expectations:

Source: QuantifiedAlpha.com

We've found through historical back testing that stocks that beat earnings estimates consistently, are extremely likely to keep beating estimates. This is crucial as stock prices can experience wild swings in price depending on how earnings come out relative to expectations. Hawaiian Electric has the best track record, having beaten EPS estimates by 12% last quarter (6 straight beats) and revenue estimates by 8% (2 straight beats). Edison International (NYSE:EIX) has the best track record for EPS, having beaten the Wall Street consensus EPS estimates 8 times in a row. PPL Corporation (NYSE:PPL), Westar Energy, and NextEra Energy (NYSE:NEE) are names we haven't seen yet, that have all outperformed expectations as well.

D) Conclusion

Now that we've analyzed the sector as a whole and the individual group leaders in the group, it is time to see which utility stock comes out on top. The table below shows the electric utility stocks we expect to outperform the market the most:

Vanadium has been talked about as a supermaterial in the past yet the conversation actually now has some legs considering recent events. Over the past week, major U.S. power producer Exelon ($EXC) formed a strategic relationship with Bloom Energy to boost the reliability in the distributed energy markets that the company serves. With reliability increasingly becoming the battle cry for utilities players, this first of its kind alliance is a major blessing for energy storage solutions and that has me excited about the prospects for vanadium more than ever. 

Vanadium redox batteries can help the intermittent wind and solar markets gain more viability with mainstream customers. Additionally, as seen with American Vanadium’s ($AVCVF) CellCube news earlier this week, capturing energy is the heart and soul for a successful remote microgrid environment. But vanadium usage for storage solutions may not be the sole driver for bullish sentiment for this material. 

Tesla Motors ($TSLA) generated a lot of buzz last week topping analyst sales estimates. Elon Musk has made no secret that Tesla may get into battery solutions and to me that opens the door even wider for vanadium, especially since the automaker already filed patents last Fall for metal air battery technology. This metal air battery technology will include lithium but it will also include vanadium. Therefore at a time when Tesla is increasingly thinking ahead to future battery iterations, it may not be so far-fetched to think the company will look to use metal-air to complement its existing lithium ion battery in order to really boost range. 

Then there’s Russia. Russia, along with China and South Africa are the biggest suppliers of vanadium. With a growing number of sanctions on Russian interests and Putin attempting to fight back with sanctions of his own, the vanadium market is one to definitely keep an eye on. This to me makes vanadium produced in geopolitically friendly areas very attractive. 

Considering Energy Fuels ($UUUU) produced over 2 million pounds of vanadium in 2013, this miner, known more for its uranium assets, has a lot of skin in the vanadium game as well. In 2014, Energy Fuels is not expected to produce any vanadium but that’s due to less than favorable economics which forced the company to shut several producing mines. Therefore if vanadium continues to get more attention for energy storage and EV battery solutions, something I’m fully expecting, Energy Fuels is strongly positioned to capitalize on market developments that will no doubt cause the price of vanadium to jump higher. 

Stay tuned to this feed as we next explore how vanadium could help automakers cut vehicle weight.  

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Why Tesla Topping 35,000 Car Sales in 2014 is Irrelevant

Before I get an inbox full of hate mail, let me say that I really do like Tesla Motors ($TSLA) and applaud Elon Musk’s efforts to revolutionize the auto industry and the way vehicles are ultimately sold and driven. With that said, I’m also a Strategist who has some concerns for the company, especially with a bold $28 billion market cap in a rocky stock market that may see higher interest rates sooner than later if Dallas Fed President Richard Fisher has his way. 

While Q214 EPS did beat the street consensus estimates for the electric vehicle maker, 2014 doesn’t really paint the true story for Tesla. I say that because so much is about to change for this growth story and any hiccup would likely have massive selling pressure repercussions for shareholders. 

Let me call it like it is. It’s been pretty hard to bet against Tesla and Team Musk. However, the next three years are going to be very different than the last three years for the company. That means buying Tesla at current valuation is really an option on success the company has yet to achieve for the new gigafactory it is partnering on with Panasonic, the gulllwing doored Model X SUV due out in the Fall of 2015 and the cheaper Gen 3 sedan that could fetch lower than $35,000 per unit in 2017. I should point out the pre-orders for the Model X are already sold-out so the real onus is on Tesla to now deliver these vehicles on-time. A recent upgrade to the company’s Freemont manufacturing plant was done in preparation of the Model X production, but all eyes will likely be focused on the new gigafactory and its potential to avoid sales delays. 

Tesla does still have issues selling directly to consumers (something I’ve believe is unconstitutional by the way). Additionally, there has not been a date yet released for when the new gigafactory will be up and running. 

Speaking of the gigafactory, it could be a mistake for Tesla to use this new massive plant to solely supply batteries for the electric vehicle market. Why? There is a huge need for reliable power, especially for growing distributed power networks, a point strengthened earlier this week Exelon ($EXC) announced a new, first of its kind strategic relationship with Bloom Energy. This further suggests there is big opportunity in power storage solutions for Tesla to get involved in. Therefore I’d be excited if the company actually expanded its relationship with SolarCity ($SCTY) to use battery packs to more broadly provide energy storage solutions rather than simply focus on the EV market. That last point for me is a big one to keep in mind especially at a time when rival automakers like Toyota ($TM) are now more publicly endorsing fuel cell batteries, something Elon Musk basically called a terrible choice for autos during yesterday’s Q214 earnings call. 

With a rising interest rate environment much more likely before the Model 3 is slated to be released (maybe even before the Model X comes out), Tesla now has the extra risk of more buyers canceling their orders due to financing options that may be less favorable since higher APR rates and that whopping 10% down payment to finance may not be as attractive to some consumers. Any rise in mortgage rates or retiring of the federal tax incentive for EVs may also take some potential buyers who plopped down the high cost for reservations out of the luxury auto market. 

Time will certainly tell how Tesla matures as a car company and which energy battery will ultimately power our future autos. With so much happening at Tesla from now to 2017, investors have a lot to contemplate from a micro and macro perspective. That means for investors, there is a bigger picture that goes well beyond this year’s sales figures. Therefore with so much to consider when digesting the Tesla story, I’d be more inclined to be a shareholder at lower levels in order to make the investment a bit less risky. Considering the stock has been higher by 24% since late May, waiting for a pull-back may not be a bad idea anyway.

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Back in April, I wrote post Exelon’s (EXC) Pepco Holdings (POM) merger conference call how it was becoming increasingly apparent that the future of the utility industry is all about the customer experience. On the heels of the Pepco deal, I became more confident in Exelon’s ability to use scale in its operations to invest in infrastructure and system reliability and storm response. Fast-forward to yesterday’s news  Exelon is now partnering with Bloom Energy for their on-site fuel-cell power generation systems and it is even more evident that Exelon is truly locked and loaded on its customer, someone with a growing number of more affordable distributed power choices and storage solutions these days. 

The deal with Bloom, the first of its kind in the power industry, further highlights the strength in demand for distributed commercial power systems and how important it has become to create better system reliability and provide quicker storm response for customers.

This suggests Exelon just backed its corporate slogan of “Performance that Drives Progress” with action by way of the long-term strategic partnership with Bloom. In the process, Exelon may have also just thrown down a gauntlet to the rest of the utility sector to create a more sustainable future for customers, something that should bode really well for Exelon and perhaps even help create a whole new demand client for Bloom’s clean power systems. 

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Photo: Some rights reserved by BloomEnergy

After yesterday's 1.4% advance, the utilities sector once again took the lead as the best performing major sector in the U.S. market in 2014.  I discussed the technical situation in last month's MorningWord, when the Dow Jones Utility Index broke out to a new all-time high:

Dow Jones Utility Index monthly chart, Courtesy of Bloomberg

As part of the back and forth action in the utilities sector in the past few months, both implied and realized volatility have gradually inched higher as options traders re-priced the market after the breakout:

30 day implied volatility in blue, 10 day realized volatility in white, Courtesy of Bloomberg

While most assets have implied volatility near multiyear lows, the utility sector is an outlier in that options prices are near the middle of the 2 year range.

Given the outperformance in the sector and the technical situation, I wanted to take a brief look at the largest stocks in the sector.  The 5 largest components are DUK, NEE, D, SO, and EXC.

Those 5 components should be considered in two separate groups. NEE, D, and SO are the three growth stocks, where EPS is 40-100% higher over the past 10 years, and the stocks' valuation on a Price/Book basis is between 1.75 and 3.50.  On the other end are DUK and EXC, which are the cigar butts of the group.  EXC annual EPS has actually contracted over the past 10 years (and has been very volatile in the process), while DUK EPS is up about 20% in the past decade.  EXC and DUK both have a P/B ratio in the 1.2 to 1.3 range.

Some of the relative strength or weakness among the utilities can be attributed to geographic disparity.  NEE is based in Florida, a major growth market, and has benefitted from a higher growth in demand than utilities in other areas.  SO is headquartered in Georgia, and Dominion is in Virginia and North Carolina.  All 4 of those states have had above average population growth over the past 5 years (see the list of population growth by state).  Meanwhile, Excelon operates primarily in Illinois and Pennsylvania, where the population has hardly grown.  Duke is based in North Carolina as well, though its operations are more diversified.

In terms of management prowess, NEE looks like the standout of the group, as EPS has grown in each year since 2005.  Moreover, the company is making a strong push in wind and solar power plants in the U.S.  Though the renewables segments are still a small part of the overall business, the long-term prospects look encouraging.

However, valuation for the growth stocks, NEE, D, and SO, is significantly higher than EXC and DUK, and also quite a bit higher than the historical valuation of NEE, D, and SO.  That is of course an indication of the conducive market backdrop over the past few years, and the search for yield that has led so many investors to the utilities sector.

At this juncture, I'd still rather buy the consistent performers, like NEE and SO, and possibly hedge some of the risk of a breakdown in the utilities sector as a whole with farther dated XLU puts.