Utilities Sector Analysis
Clark Seiling & Saar Mahna
What’s on the agenda:
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Overview of the Sector
Business Analysis
Economic Analysis
Financial Analysis
Valuation
Recommendation
Questions
S&P 500 weights vs. SIM Portfolio
SIM Portfolio
S&P 500
Technology
Health Care
Energy
Industrials
Utilities
11%
4% 3% 2%
9%
18%
10%
Financials
Cons. Disc.
Cons. Staples
Materials
Telecom
3% 4% 2%
19%
9%
14%
16%
12%
11%
Technology
Health Care
Energy
Industrials
Utilities
Financials
Cons. Disc.
Cons. Staples
Materials
Telecom
13%
14%
14%
12%
Industry Breakdown in Utilities Sector
Industries
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Diversified Utilities
Electric Utilities
Foreign Utilities
Gas Utilities
Water Utilities
Market Capitalization
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11,988.6 Billion
6,125.9 Billion
25.2 Billion
1,629.3 Billion
1,490.7 Billion
Who are the largest players in Utilities?
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Duke Energy Corporation
National Grid
Dominion Resources, Inc.
The Southern Company
NextEra Energy, Inc.
Enbridge Inc.
Exelon Corporation
American Electric Power
Utilities Performance:
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Year to Date:
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Quarter to Date:
Utilities Life Cycle
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Regulation has kept the utilities sector in the earliest phase of the life cycle.
Companies focus on gaining market share because there is so much
regulation affecting revenues and profit margins.
There are many different players across the country, but it is hard for them
to be nationwide producers due to regulations and transportation costs.
Factors Facing the Utilities Sector
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External Factors:
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Weather: affects demand for energy
Regulation: affects revenue and profit margins
Supply & Demand Factors:
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Commodities: sector is heavily tied to fossil fuels such as coal,
natural gas, and oil
Substitutes: potential threats from wind, solar, or other clean
energy resources
Commercial and Residential Real Estate: older buildings require
more energy to keep warm/cool, but as the construction
market picks up, new buildings using less energy will lower
revenue in the utilities sector
Product Breakdown
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Natural Gas and Renewable Energies on the rise, while
Petroleum and Coal are on the decline
Geographic Breakdown
Five Forces Analysis
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Barriers to Entry: Low
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Buyer Power: Low
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Suppliers are affected by changes in prices to gas, oil, coal, etc. and pass
these prices on to utilities companies
Threat of Substitutes: Low
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Unless a large consumer, most buyers are given a set price at how much
they pay for their usage
Supplier Power: High
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Large upfront costs for entrants – setting up infrastructure
Regulatory approval – may take time
It is expensive for people to buy generators of their own to supply
energy for their home, so the substitutes are also expensive
Rivalry: Low
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While there is competition amongst firms, most operate by geographic
region, so they have a little bit of a monopoly in their region. However,
this makes it very difficult to expand
US Real GDP vs. Utilities
S&P Price Index vs. Utilities
US Oil & Gas Rig Count vs. Utilities
Drilling of Oil & Gas Wells vs. Utilities
Petroleum Imports vs. Utilities
New Construction: Power vs. Utilities
Producer Price Index: Nat. Gas vs. Utilities
Producer Price Index: Gasoline vs. Utilities
Financial Analysis
Financial Analysis
Financial Analysis
Valuation
Absolute Basis
High
Low
Median
Current
P/Trailing E
16.5
10.2
13.2
16.1
P/Forward E
17.0
10.3
13.1
15.9
P/B
1.8
1.3
1.5
1.6
P/S
1.7
.8
1.2
1.5
P/CF
7.8
5.1
6.5
7.4
Relative to
S&P
High
Low
Median
Current
P/Trailing E
1.1
.66
.96
.98
P/Forward E
1.2
.72
.99
1.0
P/B
1.0
.6
.7
.6
P/S
1.2
.9
1.0
1.0
P/CF
.8
.5
.7
.7
Valuation (Price to Book, Relative to S&P)
Valuation (Price to Cash Flow)
Recommendation
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Sell 70 basis points to fall in line with S&P 500.
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Rationale:
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Slow growth and defensive sector, which has already attained
most of its upside coming out of the recession
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Additionally, this sector is risky due to its ties to gasoline prices
and the potential for other sources of energy
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Finally, since the sector is so highly regulated, we would have
exposure to political risks, and our revenues earnings would
likely be capped
What questions do you have?