Utilities Sector Presentation Jiali (Jenny) Chen Tyler Giannona1 Jason Head •
•
•
•
•
•
Sector Overview Business Overview Economic Analysis Financial Analysis ValuaBon Analysis RecommendaBon UBliBes Sector Agenda •
•
•
•
•
•
Sector Overview Business Overview Economic Analysis Financial Analysis ValuaBon Analysis RecommendaBon UBliBes Sector Agenda Portfolio Sector Weightings SIM 3% 23% 8% 8% 4% 3% 3% 18% 11% 8% 15% 9% Technology Healthcare Industrials Energy Basic Materials 19% Financials Cons. Staples Cons. Disc. Telecom UBliBes 17% 10% 15% 11% Technology Healthcare Industrials Energy Basic Materials Financials Cons. Staples Cons. Disc. Telecom UBliBes UBliBes Sector 7% 3% 3% S&P 500 Industry Size Market Cap Electric UBliBes $539.81B Gas UBliBes $57.23B Water UBliBes $29.01B MulB-­‐UBliBes $402.76B Independent Power Producers $76.78B Total Market Cap $1.11T Total S&P 500 Market Cap $19.06T UBliBes Sector Industry Largest Utility Companies (By Market Cap) Market Cap 1. Duke Energy CorporaBon (DUK) 53.1B 2. NaBonal Grid (NGG) 49.6B 3. NextEra Energy, Inc. (NEE) 45.9B 4. Dominion Resources, Inc. (D) 41.4B 5. Southern Company (SO) 40.0B Total 230B Percentage of Industry 21% UBliBes Sector Company Sector Performance UBliBes Sector 1-­‐Year Sector Performance (cont’d.) UBliBes Sector Year-­‐to-­‐Date •
•
•
•
•
•
Sector Overview Business Analysis Economic Analysis Financial Analysis ValuaBon Analysis RecommendaBon UBliBes Sector Agenda UBliBes Sector Business Cycle Sources: Fidelity Investment (AART)
Business cycle (cont’d.) Underperformed in
mid cycle
UBliBes Sector Defensive sector
Barrier to entry—High
•  Need regulatory approval
•  Heavy capital investment
Buyers power—Moderate
•  Have to use local electricity utility
•  Exert influence on rate cases
Suppliers—High
•  Strong bargaining power in the negotiation of
long-term contracts
Threat of substitutes—
Low
•  No substitute in transmission or distribution.
•  Growing substitute in generation.
Rivalry—Low
•  geographic monopolies
•  Cooperate to meet the requirement set by the
state
UBliBes Sector Porter’s Bive force model How it operates UBliBes Sector Electricity price •  Fuels—The power plant can use different fuel sources to generate energy such as coal,
natural gas, nuclear power and different fuel sources have different costs.
•  Interest rate—The regulated and capital-intensive nature of the electric utility
industry makes the financial performance of these companies very sensitive to the
level of interest rates and available returns.
•  Weather conditions—The electric utility industry’s demand peak come with the warm
weather in the second and third quarters, when customers are running air conditioners.
By contrast, cold weather tends to have a low demand for electricity because most
customers use electricity simply to start their heaters, while fuel (oil or gas) provides
the heat.
•  Customer profile—The proportion of its sales that go to large industrial and
wholesale customers versus smaller retail customers can have a big influence on both
its expenditures and its rates.
•  Regulations—In some states, prices are fully regulated by Public Service
Commissions, while in others there is a combination of unregulated prices (for
generators) and regulated prices (for transmission and distribution).
UBliBes Sector Factors that affect demand or supply
UBliBes Sector Fuel sources Interest rate UBliBes Sector U.S. Government 10-year Bond Yield:
Weather UBliBes Sector Cooling degree-days:
Weather cont’d UBliBes Sector Heating degree-days:
Customer base
consumption share
Average price (cents per kwh)
Residential
36%
12.1
Commercial
35%
10.3
Industrial
29%
6.8
Transportation
0.20%
10.3
Total
100%
10.08
In 2013, U.S. electricity consumption totaled nearly 3,831 billion
kilowatthours (kWh).
In 2013, the average retail price of electricity in the United States
was 10.08 cents per kilowatt-hour (kWh).
UBliBes Sector Customer proBile •
•
•
•
•
•
Sector Overview Business Overview Economic Analysis Financial Analysis ValuaBon Analysis RecommendaBon UBliBes Sector Agenda UBliBes Sector Natural Gas UBlity Sector Natural Gas Price UBliBes Sector CPI UBlity Sector Consumer Price Index UBliBes Sector GDP UBlity Sector Gross DomesBc Product •
•
•
•
•
•
Sector Overview Business Overview Economic Analysis Financial Analysis ValuaBon Analysis RecommendaBon UBliBes Sector Agenda ROE and ROA ROA UBliBes Sector ROE Margins UBliBes Sector OperaNng Gross Performance v. S&P S5UTIL SXP 5-­‐Year 8.35% 12.19% 1-­‐Year 7.50% 10.47% 3 Month -­‐7.18% 1.15% •  UBliBes has conBnuously underperformed in comparison •  Has recently slipped with talks of interest rate increases UBliBes Sector •  Div. yield of UBliBes Sector= 3.58 •  Div. yield of SXP= 1.98 •  Sector conBnuously distributes earnings through dividends UBliBes Sector Debt to Assets •  UBliBes sector has considerable amounts of debt •  More debt can lead to less cash available •
•
•
•
•
•
Sector Overview Business Overview Economic Analysis Financial Analysis ValuaNon Analysis RecommendaBon UBliBes Sector Agenda As of 3/29/2015 S5UTIL Index v. S&P 500 P/E UBliBes P/S S&P UBliBes P/B S&P UBliBes S&P 5 Year High 18.92 18.69 1.8 1.85 1.92 2.91 5 Year Low 11.18 12.24 .96 1.06 1.31 1.83 5 Year Median 14.10 15.49 1.31 1.30 1.55 2.25 Current 17.08 18.48 1.62 1.82 1.73 2.88 UBliBes Sector RelaNve P/E P/S P/B 5 Year High 1.01 .97 .66 5 Year Low .91 .91 .72 Median .91 1.01 .69 Current .92 .89 .60 •  UBliBes are currently near their 5 year highs in all 5 categories •  Overpriced and will be tough sustain as interest rates increase UBliBes Sector Relative Basis Stocks Trailing P/E Forward P/E P/B P/S AES Corp (AES) 11.75 9.38 2.05 .51 Calpine (CPN) 9.43 19.81 2.44 1.06 Edison Intl. (EIX) 12.69 15.71 1.84 1.5 S5UTIL Index 17.08 16.63 1.73 1.62 SPX Index 18.48 17.62 2.88 1.82 P/S SPX P/B S5UTIL Forward P/E EIX Trailing P/E CPN 0 5 10 15 20 25 AES UBliBes Sector Notable Utility Stocks Recommendation •
•
•
Dividends Interest Rates Regulation UBliBes Sector •  Hold UBliBes Sector Questions?