Utilities Sector Stock Presentation
Yifeng Su, Graham Kauffman, Scott McVey, Tianning Li
The Ohio State University, Fisher College of Business
Agenda
 Overview
 Discussion of Stocks
 Xcel Energy Inc. (XEL)
 NRG Energy Inc. (NRG)
 Recommendation
2
S&P Sector Breakdown
Overview
XEL - HOLD
NRG - HOLD
Recommendation
Recommendations Summary
 Hold; but lower position to S&P Allocation
Level (3%)
Security
Recommendation
Target Price Change
Current Percentage of
Assets
NRG Energy Inc (NGR)
Hold
13.21%
2.41%
XCEL Energy Inc. (XEL)
Hold
7.17%
1.00%
Overview
NRG – HOLD
XEL - HOLD
4
Recommendation
Overview
XEL - HOLD
NRG - HOLD
Recommendation
Business Analysis
Xcel Energy Inc. engages in the generation, purchase, transmission,
distribution, and sale of electricity.
Revenue breakdown
1%
17%
83%
Electric
Overview
XEL - HOLD
NRG - HOLD
Natural Gas
Other
Recommendation
Business Analysis
Market Profile
52-Week Range:
120%
$26.90-$31.79
Market Cap:
Stock Performance
100%
80%
$15.13B
60%
Diluted Shares Outstanding:
Dividend Yield:
Forward P/E:
498.3M
40%
20%
4.0%
0%
14.53×
Beta:
-20%
0.15
-40%
Held by Institutions:
65.80%
Debt to Total Capital:
55.59%
Overview
Xcel Energy Inc.
S&P 500 Utilities Sector Index
S&P 500 Index
XEL - HOLD
NRG - HOLD
7
Recommendation
Business Analysis
Key Drivers:
• Renewable energy will benefit operating margin.
XEL: Nation’s No.1 wind power provider for nine years running
Overview
XEL - HOLD
NRG - HOLD
8
Recommendation
Business Analysis
Key Drivers:
• Renewable energy will benefit operating margin.
• The extreme weather is a factor to boost demand.
Overview
XEL - HOLD
NRG - HOLD
9
Recommendation
Business Analysis
Key Drivers:
• Renewable energy will benefit operating margin.
• The extreme weather is an factor to boost demand.
• Lower leverage, lower interest expenses and financial
flexibility.
Overview
XEL - HOLD
NRG - HOLD
10
Recommendation
Business Analysis
Risks:
• The rise of market price of coal, natural gas and uranium & the
ability to reset rates level and recover the costs efficiently.
• The change of the emission controls policies, climate and the
safety requirements for natural gas pipelines
• Continued trend of declining use per customer
• Financial risks and interest rates risk
• Loom generational transition over the next 10 years
Overview
XEL - HOLD
NRG - HOLD
11
Recommendation
Financial Analysis
• The revenue increased by 7.8% in 2013
due to the increased rate and higher fuel
and purchased power cost recovery.
• High Net Margin, ROE & ROA shows
outstanding profitability.
• Low A/E ratio shows good solvency.
Lower interest expenses primarily due to
refinancing at lower interest rates.
Overview
XEL - HOLD
NRG - HOLD
12
Recommendation
Valuation
Analyst: Tianning Li
Date: 04/07/14
Year
Terminal Discount Rate =
Terminal FCF Growth =
2014E
Revenue
% Growth
2015E
11,305
Operating Income
Operating Margin
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
2016E
2017E
9.0%
3.2%
2018E
2019E
2020E
Implied equity value/share
Upside/(Downside) to DCF
Overview
2023E
2024E
12,104
12,564
13,091
13,720
14,447
15,140
15,776
16,376
16,900
3.5%
3.5%
3.8%
4.2%
4.8%
5.3%
4.8%
4.2%
3.8%
3.2%
2,035
2,152
2,275
2,425
2,592
2,771
18.4%
18.8%
19.3%
19.8%
20.2%
1,049
1,116
1,196
1,285
12,000 1,485
1,382
6.4%
7.1%
7.5%
1,017
1,064
1,114
1,194
9.0%
9.1%
9.2%
9.5%
-90
-29
-30
-25
-0.8%
-0.2%
-0.2%
-0.2%
2,900
3,200
2,690
2,764
25.7%
27.4%
23.0%
22.0%
-1,049
-411
-310
13.5%
-60.8%
-24.4%
7.6%
7.4%
10,000
21.00%
1,309
8,000 1,427
10.0%
18.00% 10.4%
6,000
-26
-14
15.00% -0.1%
-0.2%
4,000
2,684
12.00% 2,607
20.5%
2,000
9.00%
-18 0
6.00%
2,947
3,119
3,281
3,439
3,583
20.4%
20.6%
20.8%
21.0%
21.2%
6.9% 1,679
1,583
1,770
7.8%
1,859
10%
1,941
Revenue & Growth
6.6%
6.1% Margin
5.4%
Operating
3.3%
5.0%
4.4%
5%
1,560
1,696
1,830
1,932
2,028
10.8%
11.2%
11.6%
11.8%
0%
12.0%
-14
0
0
0
-0.1%
0.0%
0.0%
0.0%
2,456
2,271
2,129
0
0.0%
-5%
2,028
19.0%
17.0%
15.0%
14.0%
13.0%
12.0%
-10%
291
673
1,103
-13.9%
-94.1% -1690.0%
2009130.8%
2010 64.0%
2011
3.00%
Current Price
2022E
11,695
18.0%
-924
2021E
Revenue
-4.9%
2,209
1,391
1,662
26.1%
2012
19.5%
2013
1,941
-15%
16.7%
Growth rate
0.00%
$ 30.53
$ 33.09
8.4%
2008
XEL - HOLD
2009
NRG - HOLD
13
2010
2011
2012
2013
Recommendation
Valuation
Sensitivity Analysis
Terminal Growth Rate
2.2%
2.7%
3.2%
3.7%
4.2%
4.7%
7.5%
41.01
45.00
49.92
56.13
64.22
75.20
8.0%
36.10
39.26
43.09
47.80
53.76
61.52
8.5%
32.00
34.56
37.60
41.26
45.79
51.50
9.0%
28.55
30.64
33.09
36.00
39.52
43.86
9.5%
25.59
27.32
29.33
31.68
34.48
37.86
10.0%
23.04
24.49
26.16
28.08
30.34
33.02
10.5%
20.83
22.05
23.44
25.04
26.89
29.06
$ 33.09
Terminal
Discount
Rate
Overview
XEL - HOLD
NRG - HOLD
14
Recommendation
Valuation
Relative Valuation
30.53
Current Price
Date
2014/3/31
Peers
Current
Multiple
Current
Multiple
ED
Target
Multiple
Target Price
AEP
NEE
DUK
ETR
P/E
14.6×
14.4×
16.7×
14.9×
P/S
1.4×
1.6×
2.7×
P/B
1.6×
1.5×
2.3×
% chg from
current price
13.6×
13.7×
14.7×
30.65
0.4%
2.1×
1.0×
1.3×
1.7×
37.86
24%
1.2×
1.2×
1.3×
1.5×
28.55
-6.5%
average
32.35
6.0%
Target Price
$32.72
7.17% upside
$33.09
$32.35
DCF Valuation
Relative Valuation
Overview
XEL - HOLD
HOLD
NRG - HOLD
15
Recommendation
NRG Energy
Overview
XEL - HOLD
NRG - HOLD
16
Recommendation
Business Analysis

Power and Energy firm that produces and delivers energy and
services in major power markets in the US. They engage in the
ownership, development, and operation of power generation facilities.
They also are involved in the trading of energy and capacity, as well as
the supply of energy and complementary products to customers.
Overview
XEL - HOLD
NRG - HOLD
17
Recommendation
Commitment to Renewables
 They have one of the largest renewable portfolios in the
country and NRG has shown a commitment to continued
growth in the area. They recently purchased Roof Diagnostics
Solar which will enable them to expand their solar business
into the residential market.
Overview
XEL - HOLD
NRG - HOLD
18
Recommendation
Business Information
Business Information
Market Data
Market Capitalization
Shares Outstanding
Dividend
Dividend Yield
Beta
52 Week Price Range
12 Month Total Return
Financial Data (FY 2013)
2013 Revenue
Revenue Growth (Prev. Yr.)
Gross Margin
Operating Margin
EBITDA
Earnings Per Share
Adjusted EPS
Price to Earnings
Overview
Earnings Estimates
$10.34B
325.3M
$0.48
1.51%
0.59
$24.86 - $32.04
21.84%
$11.29B
31.44%
28.11%
8.23%
2271
($1.22)
$1.45
18.8
Revenues and Earnings are both
expected to grow in the coming years
significantly. NRG is also at the top of
their 52 week price range.
XEL - HOLD
NRG - HOLD
19
Recommendation
ROE and ROA
ROA and ROE are both significantly below the averages of
both the market and the sector. However, I am not
concerned as they have continued to have success with
stock price.
Overview
XEL - HOLD
NRG - HOLD
20
Recommendation
Stock Performance
 The stock has performed very well the past 12 months and
has outperformed the S&P 500 significantly during the last
10 years.
Overview
XEL - HOLD
NRG - HOLD
21
Recommendation
Relative Valuation
 Compared to the rest of the
market for the past 6 years,
they have been undervalued.
However, compared to their
own historical multiples, their
multiples are at the top of their
6 year range.
Relative to Sector Minimum Maximum Average Median Current
Price/Earnings
0.40
1.51
1.08
1.39
1.15
Price/Cash Flow
0.54
1.17
0.73
0.64
1.26
Price/Sales
0.51
0.57
0.54
0.52
0.59
Price/EBITDA
0.47
0.82
0.61
0.52
0.89
Price/Book Value
0.38
0.61
0.50
0.51
0.68
EV/EBITDA
0.53
1.53
0.96
0.80
1.17
Relative to S&P
Minimum Maximum Average Median Current
Price/Earnings
0.38
1.33
0.94
1.21
1.09
Price/Cash Flow
0.47
0.80
0.53
0.44
0.88
Price/Sales
0.53
0.49
0.51
0.50
0.54
Price/EBITDA
0.37
0.47
0.39
0.34
0.52
Price/Book Value
0.28
0.38
0.35
0.36
0.41
97.50
1.31
1.04
0.75
1.17
EV/EBITDA
NRG- Absolute Valuation
Minimum
Maximum Average
Median Current
Target
Target /
Multiple
Share
Price/Earnings
4.88
24.20
14.59
18.53
18.77
16.00 $
Price/Cash Flow
2.76
8.07
4.18
3.67
8.07
Price/Sales
0.48
0.91
0.66
0.64
0.91
Price/EBITDA
1.81
4.50
2.65
2.30
4.50
Price/Book Value
0.55
1.07
0.76
0.78
1.07
Overview
XEL - HOLD
1.24 $
19.84 Average
5.50 $
5.28
$
29.04 Minimum $
19.84
0.85 $
34.97 $
29.72 Maximum $
32.37
3.75 $
1.00 $
7.04 $
32.37 $
26.40 Median
$
29.04
32.37 Value
$
29.00
NRG - HOLD
22
Target Price
$
27.47
Recommendation
DCF Valuation
NRG Energy (NRG) - Discounted Cash Flow Analysis and Model
Analyst: Graham Kauffman
Date: 04/01/2014
Year
2013A
Revenue
11,295
% Growth
34.0%
Operating Income
930
Operating Margin
Interest and Other
Interest % of S ales
Taxes
Tax Rate
Net Income
% of S ales
Subtract Cap Ex
4.0%
2,368
16,528
4.0%
2,463
17,189
4.0%
2,561
17,877
4.0%
2,682
18,592
4.0%
2,789
2023
19,336
4.0%
2,900
15.0%
(848)
(960)
(1,017)
(1,058)
(1,100)
(1,144)
(1,190)
(1,238)
(1,287)
(1,339)
(1,392)
-7.5%
-7.2%
-7.2%
-7.2%
-7.2%
-7.2%
-7.2%
-7.2%
-7.2%
-7.2%
-7.2%
(282)
246
305
335
348
367
382
397
418
435
452
20.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
554
692
782
813
857
891
926
976
243.6%
24.9%
12.9%
4.0%
5.4%
4.0%
4.0%
5.4%
4.0%
4.0%
677
1,266
992
859
679
688
9.0%
9.0%
8.0%
7.0%
6.0%
5.0%
3.8%
3.7%
3.5%
(327)
(194)
(75)
(220)
(229)
(238)
(248)
(258)
(268)
(279)
(290)
-2.9%
-1.5%
-0.5%
-1.5%
-1.5%
-1.5%
-1.5%
-1.5%
-1.5%
-1.5%
-1.5%
537
437
735
764
715
744
688
715
651
677
4.0%
3.1%
5.0%
5.0%
4.5%
4.5%
4.0%
4.0%
3.5%
3.5%
891
841
672
773
766
-12.3%
-5.6%
-20.0%
15.1%
-1.0%
5,552
46%
Projected Equity Value
12,063
100%
Free Cash Flow Yield
10.60%
1,447
32.8%
1,322
1,149
-20.6%
1,222
1,042
-9.3%
1,112
1,056
9.5%
1,089
1,266
1,015
11.1%
6,510
1,016
-2.6%
54%
(26.6)
18.5
14.8
(31.3)
21.8
17.4
Current EV/EBITDA
11.0
7.7
7.2
Projected EV/EBITDA
11.8
8.3
7.7
Terminal Value
13,144
Free Cash Yield
5.83%
Terminal P/E
12.5
Terminal EV/EBITDA
7.5
323
Current Price
$
Implied equity value/share
$
31.80
37.35
17.4%
Debt
15,852
Cash
2,129
Cash/share
2,262
15,892
2022E
15.0%
NPV of terminal value
Upside/(Downside) to DCF
4.0%
2021E
15.0%
NPV of Cash Flows
Shares Outstanding (Millions)
2,175
15,281
2020E
14.9%
-204.9%
Projected P/E
4.0%
2019E
14.9%
% Growth
Overview
2,086
14,693
2018E
14.9%
(1,038)
Current P/E
5.9%
2017E
14.8%
14.0%
Free Cash Flow
14,128
2016E
14.8%
1,581
Capex % of sales
1,832
2015E
14.8%
1,256
Plus/(minus) Changes WC
18.1%
3.0%
13.7%
(386)
% of S ales
13,339
9.0%
Terminal FCF Growth =
8.2%
% Growth
Add Depreciation/Amort
2014E
Terminal Discount Rate =
6.59
XEL - HOLD
NRG - HOLD
23
Recommendation
Sensitivity Tables
Target Price Sensitivity
Terminal Discount Rate
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
10.00%
10.50%
11.00%
1.0%
42.13
39.28
36.82
34.68
32.80
31.13
29.64
28.31
27.10
1.5%
44.09
40.86
38.12
35.76
33.71
31.90
30.30
28.87
27.59
2.0%
46.43
42.73
39.64
37.01
34.75
32.77
31.04
29.50
28.13
2.5%
49.30
44.98
41.44
38.47
35.95
33.77
31.88
30.21
28.73
3.0%
52.88
47.73
43.59
40.19
37.35
34.92
32.84
31.02
29.42
3.5%
57.48
51.16
46.23
42.26
39.00
36.27
33.94
31.94
30.19
4.0%
63.62
55.58
49.52
44.79
40.98
37.85
35.23
33.00
31.07
4.5%
72.22
61.47
53.76
47.95
43.41
39.76
36.75
34.23
32.09
5.0%
85.11
69.71
59.40
52.01
46.44
42.09
38.58
35.70
33.28
Terminal FCF Growth
$
37.35
Upside/ Downside Sensitivity
Terminal Discount Rate
17.4%
Terminal FCF Growth
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
10.00%
10.50%
11.00%
1.0%
32.5%
23.5%
15.8%
9.0%
3.1%
-2.1%
-6.8%
-11.0%
-14.8%
1.5%
38.6%
28.5%
19.9%
12.5%
6.0%
0.3%
-4.7%
-9.2%
-13.2%
2.0%
46.0%
34.4%
24.7%
16.4%
9.3%
3.1%
-2.4%
-7.2%
-11.5%
2.5%
55.0%
41.5%
30.3%
21.0%
13.0%
6.2%
0.2%
-5.0%
-9.6%
3.0%
66.3%
50.1%
37.1%
26.4%
17.4%
9.8%
3.3%
-2.5%
-7.5%
3.5%
80.8%
60.9%
45.4%
32.9%
22.6%
14.0%
6.7%
0.4%
-5.1%
4.0%
100.1%
74.8%
55.7%
40.8%
28.9%
19.0%
10.8%
3.8%
-2.3%
4.5%
127.1%
93.3%
69.0%
50.8%
36.5%
25.0%
15.6%
7.7%
0.9%
5.0%
167.7%
119.2%
86.8%
63.6%
46.0%
32.3%
21.3%
12.3%
4.6%
Overview
XEL - HOLD
NRG - HOLD
24
Recommendation
Recommendation
Stock: NRG Energy
NYSE Ticker: NRG
Current Price: $31.80 (March 31, 2014)
Estimated 52-Week Target Price: $36.00
Recommendation: HOLD
Analyst: Graham Kauffman
Overview
XEL - HOLD
NRG - HOLD
25
Recommendation
Recommendation
Security
Current
Recommendation
Price
Target
Price
Change
Current
%age
Assets
Suggested
%age
Assets
NRG Energy Inc
(NGR)
Hold
$31.80
+13.21%
2.41%
2.00%
XCEL Energy Inc.
(XEL)
Hold
$30.53
+7.17%
1.00%
1.00%
Overview
XEL - HOLD
NRG - HOLD
26
Recommendation