Utilities | Sector Analysis
02.23.2010
Nihar Shah
Michael Song
Recommendation
• Decrease weight in SIM portfolio by 72 bps
• Final: Underweight 150 bps
Introduction
• Utilities Sector
– Size: 1721.2B
– Industries
Industry
Market Cap
P/E
ROE %
Div. Yield %
Price to Book
Diversified Utilities
135.0B
11.5
13.00%
4.69%
1.84
Electric Utilities
301.6B
15.1
10.00%
3.95%
1.81
Foreign Utilities
1170.9B
86.0
1.60%
1.58%
1.98
Gas Utilities
104.3B
15.7
13.80%
3.99%
3.31
9.5B
0.0
-5.20%
3.47%
1.75
Water Utilities
Source: Yahoo Finance as of 2/23/10
Largest Companies in (SPUT)
Company
Market Cap
Sales (in M)
EPS
5 Yr Growth
LT Growth
ROE
Yield
N/A
N/A
8.00%
ROE + Yield
5.00%
12.30%
4.60%
16.90%
SPUT
355.0 B
EXC
29.5 B
17.32 B
4.09
10.00%
0.00%
22.90%
4.70%
27.60%
SO
25.9 B
15.74 B
2.07
3.00%
4.00%
13.00%
5.40%
18.40%
NGG
24.7 B
24.13 B
3.85
2.00%
7.00%
25.20%
4.60%
32.90%
DUK
21.40 B
12.73 B
.83
-8.00%
4.00%
7.40%
5.80%
13.20%
FPL
19.40 B
15.65 B
3.97
12.00%
7.00%
13.60%
4.30%
17.90%
AEP
16.10 B
13.44 B
2.88
5.00%
4.00%
12.00%
4.90%
16.90%
FE
12.10 B
12.97 B
3.29
11.00%
3.00%
13.60%
5.50%
19.10%
EIX
11.00 B
12.54 B
2.59
10.00%
3.00%
11.30%
3.70%
15.00%
OKE
4.60 B
10.23 B
2.65
3.00%
10.00%
14.40%
4.00%
18.40%
S&P/SIM Weight
(.78)%
S&P/Sector Performance (YTD)
S&P/Sector Performance (YTD)
5.00%
4.00%
3.00%
2.00%
1.00%
Outperform
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
Underperform
Business Analysis
Electric
Diversified Foreign
Gas
Water
Utilities – Catalysts/Risks
• Catalysts
–
–
–
–
Rate Regulation Increase
Weather Patterns
Improvement in Economy
Green Policy (Nuclear/Water)
• Risks
–
–
–
–
Rate Regulation Neutral/Decrease
Inconsistent or over-demand
Commodity Prices
Green Policy (Electric/Diversified/Gas)
Gas Util
Sector
Mutli Util
Elec Util
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Price
Industry vs Sector Performance
450
400
350
300
250
200
150
100
50
0
Sector vs S&P Performance
Correlation: 80.93%
Outperform
Outperform
Economic Analysis
Economic Analysis
13,600
12.0
13,400
10.0
GDP
13,200
8.0
13,000
6.0
12,800
4.0
12,600
2.0
12,400
12,200
Jan-04
May-05
Oct-06
Real Gross Domestic Product
Feb-08
Jul-09
Unemployment Rate
0.0
Nov-10
Unemployment
Unemployment vs GDP
Economic Analysis
Change in GDP vs Sector Price
40
10.00
8.00
30
6.00
2.00
10
0.00
0
-2.00
% Change in Sector
% Change in GDP
20
4.00
-10
-4.00
-20
-6.00
-8.00
Aug-87
May-90
Jan-93
Apr-01
Jul-98
Oct-95
Real Gross Domestic Product
Jan-04
Oct-06
EXC.S
Jul-09
-30
Apr-12
Forecast: GDP will very slowly increase over the short term
Economic Analysis
Relative Strength of Utility Sector vs S&P 500
3.0
2.5
2.0
1.5
1.0
Aug-87
May-90
Jan-93
Oct-95
Jul-98
Apr-01
Jan-04
0.5
0.0
S&P 500
Rel Str
Oct-06
Jul-09
Apr-12
Economic Analysis
Forecast: Interest Rate will increase in the short term
Economic Analysis
Oil ETF Price (USO)
EXC.S vs OIL (USO)
120
100
80
60
40
R2 = 0.4733
20
0
100
120
140
160
180
200
Utility Sector Price (EXC.S)
220
240
Economic Analysis
Economic Analysis
Natural Gas ETF Price
(UNG)
EXC.S vs Natural Gas (UNG)
70
60
50
40
30
20
10
0
R2 = 0.7701
100
120
140
160
180
200
220
240
Utility Sector Price (EXC.S)
Forecast: Natural Gas Price will stay relatively constant in the short term
Economic Analysis
Coal EFT Price (KOL)
EXC.S vs Coal (KOL)
70
60
50
40
30
20
10
0
R2 = 0.7565
100
120
140
160
180
Utility Sector Price (EXC.S)
200
220
Economic Analysis
Forecast: Potential for long term growth
Regulation
•
State commissions are responsible for determining utilities’ proper rate bases and allowable operating expenses.
Individual states’ rulings often differ with regard to these determinations. They also differ in allowed accounting
treatments for depreciation accruals and investment tax credits. Although rulings are often presumed to be based
solely on the public interest, commissions actually seek to provide a balance between investor and consumer
interests.
Green Policy (Update)
•
On June 26, 2009, the House of Representatives passed, by a narrow 217–
205 margin, its version of a new energy bill, H.R. 2454. Included in the bill,
called the American Clean Energy and Security Act, 2005–2050, were
provisions for a cap-and-trade system that would incrementally reduce GHG
emissions, beginning with a cap on 2012 emissions that is 3% below 2005
levels. The bill, whose principal sponsor was Henry Waxman (D.–
California), also included a requirement that utilities get 15% of their
electricity from renewable energy sources and, through increasing their
energy efficiencies, reduce their electricity use 5% by 2020. Individual
states, however, would be allowed to vary these two percentages as long as
the total came to 20%.
Financial Analysis
Sector
Financial Analysis
Revenues (SPUT)
45
40
35
30
25
Margins
35%
30%
25%
20%
EBITDA
Net Profit
15%
ROE
10%
Net Profit
N/A
5%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Summary
Analysis
Conclusions
Business
Mature industry, cyclical in nature
Economic
Expect slow growth
Financial
Declining Revenue, stable profit margin
stable ROE, and declining Net Profit
Margin.
Negative
Sector seems to be trading at a slight
discount.
Slightly positive
Valuation
View
Neutral
Slightly
Negative
Overall: Slightly negative for short term
Recommendation
• Decrease weight in SIM portfolio by 72 bps
• Final: Underweight 150 bps
Questions