Utilities Sector Presentation
Luke MacAdam
Agenda
Sector Overview
Business Overview
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
2
S&P 500 Sector Weightings
Sector, Weight % (Difference from SIM Weight)
Energy, 7.78%
(+0.41%)
Consumer
Staples, 9.43%
(+1.04%)
Telecom, 2.27%
(-0.61%)
Materials,
3.13% Utilities, 2.82%
(-0.18%)
(+0.88%)
Information
Technology,
19.63% (-1.16%)
Financials,
16.63%
(-1.13%)
Consumer
Discretionary,
12.80%
(+0.19%)
Health Care,
15.42%
(-0.74%)
Utilities Sector Industries
(# of companies within S&P 500
Utilities Index):
• Electric Utilities (13 members)
• Multi-Utilities (13 members)
• Independent Power &
Renewable Electricity
Producers (2 members)
• Gas Utilities (1 member)
• Water Utilities (0 members)
Industrials,
10.09%
(+0.68%)
3
Large Market Cap Utility Companies
Industry
Market Cap
Duke Energy Corporation (DUK)
$51.91B
National Grid (NEE)
$45.55B
Dominion Resources Inc. (D)
$40.98B
The Southern Company (SO)
$40.08B
Exelon Corp
$28.11B
American Electric Power Co. (AEP)
$27.37B
Sempra Energy (SRP)
$24.99B
PG&E Corp (PCG)
$24.55B
Public Service Enterprise Group Inc. (PEG)
$20.96B
PPL Corp
$20.61B
Top Ten Market Cap Total
$325.11B
Total Utilities Sector Market Cap
$1.05T
Top Ten Percentage of Utilities Sector
30.96%
4
Utilities Sector Performance
3 Month Performance
S&P 500: +0.70%
Utilities: -2.63%
YTD Performance
S&P 500: +1.09%
Utilities: -8.15%
5
Agenda
Sector Overview
Business Overview
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
6
Electric Industry Operation
Source: New Zealand Ministry of Business, Innovation & Employment
7
U.S. Fuel Sources
Renewables:
• Hydro
• Wind
• Biomass wood
• Biomass waste
• Geothermal
• Solar
Source: EnergyPrecis
8
Customer Base - Electric
9
Customer Base - Electric
US 2014 Average:
10.45 cents/kW
10
Dividend Yields High for Utilities
11
Current Business Cycle
Mid Cycle:
• Growth peaking
• Credit growth strong
• Profit growth peaks
• Policy neutral
• Inventories, sales
grow; equilibrium
reached
Source: Fidelity Investment
12
Industry Changes
• Increased EPA regulations around carbon
emissions
• Renewable energies becoming more cost
effective as they mature
• Consumer interaction increasing
• U.S. regulatory landscape dramatically
shifting
13
•
Threat of
New
Entrants:
Low
•
High when bidding
for long term PPAs
Increasing with
deregulation of
power
•
•
New plants have high fixed
costs & big upfront capital
requirements
Brand name recognition &
trust from incumbents hard
to overcome
•
Competitive
Rivalry:
High
Porter’s
Five Forces:
Utility
Sector
Power of
Suppliers:
High
•
•
•
Power has no substitute
Inelastic short-term demand
Availability
of
Substitutes:
Low
Power of
Buyers:
Medium
•
•
Small number of
suppliers
Significant control
over generation
companies
Power from one company to
another is no different =
commodity
Increasing with deregulation
of power, more choices for
consumers
14
Agenda
Sector Overview
Business Overview
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
15
Effect on Supply: Interest Rates
Source: Fidelity Investments
16
Effect on Demand: Weather
17
Agenda
Sector Overview
Business Overview
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
18
Source: Fidelity Investments
19
Total Debt to Total Assets
20
Return on Equity
Return on Assets
21
Operating Margin
Gross Margin
22
Agenda
Sector Overview
Business Overview
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
23
Absolute Valuation
30
3.5
25
3
20
12
2
1.8
10
1.6
2.5
1.4
2
1.2
15
8
6
1
10
5
1.5
0.8
1
0.6
0.4
0.5
0
Utilities
P/E
2
0.2
0
S&P
500
4
0
S&P Utilities
500
0
S&P Utilities
500
P/B
P/S
S&P
500
Utilities
P/EBIDTA
The rectangles show the high, median, and low value of multiples compared to S&P 500
over the past 10 years. Red diamonds show current multiples.
Data current as of 5/20/15
24
Relative Valuation to S&P 500
1.4
1.2
1
The rectangles show the
high, median, and low
relative value of multiples
compared to S&P 500 over
the past 10 years. Red
diamonds show current
relative multiples.
0.8
0.6
0.4
0.2
0
P/E
P/B
P/S
P/EBITDA
Data current as of 5/20/15
25
Agenda
Sector Overview
Business Overview
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
26
Reviewing each section:
• Recent performance lagging (OW)
• Mid Business Cycle, U.S. regulatory landscape
shifting (UW)
• Fundamentals look weak (UW)
• Fed’s rate-tightening (UW)
• Valuations are favorable (OW)
UNDERWEIGHT RELATIVE TO S&P 500
27
Questions?
28