Sector Presentation: Utilities
Xingning Xu
Yingxing Ye
Jing You
Mar 26, 2013
Agenda
• Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Overview
Overview: Introduction
Utility Sector
• A category of stocks for utilities such as gas and
power. The utilities sector contains companies such as
electric, gas and water firms and integrated providers.
Overview: A Brief Look in Utility Sector
1 Day Price
Change: 0.08%
Div. Yield:
4.04%
LT D/E:
156.64
P/E: 24.0
P/FCF:
-50.08
Net Profit
Margin:
4.75%
P/B: 1.69
ROE: 4.70
Market Cap:
21,051B
Overview: Utility Sector in S&P 500
Utilities,
3.44%
Cons Disc,
11.57%
Cons Staples,
10.71%
Telecom
Svc,
18.20%
Materials,
2.96%
Energy,
10.98%
Info Tech,
18.20%
Financials,
16.17%
Industrials,
10.22%
Health Care,
12.24%
S&P 500 Sector Breakdown ( 18-Ma-2013)
Overview: Utility Sector in SIM Portfolio
Telecom
Svc,
1.19%
Utilities,
3.24%
Dividend
Cash, Receivables,
3.01%
0.05%
Materials,
2.63%
Cons
Staples,
12.35%
Cons Disc,
12.30%
Info Tech,
18.01%
Energy, 10.23%
Industrials,
10.25%
Health Care,
12.02%
Financials,
14.73%
January 2013 Monthly Appraisal
Overview: Industries Within the Sector
Industries
Weight
P/E Ratio
Diversified Utilities
54.0%
25.60
Electric Utilities
31.7%
23.30
Foreign Utilities
0.13%
13.20
Gas Utilities
7.59%
19.40
6.58
19.80
Water Utilities
Overview: Companies in Utility Sector
Company Name
Southern Co
Exelon Corp
Dominion Res/Va
Duke Energy Corp
Nextera Energy
Firstenergy Corp
American Electri
PG&E Corp
Cons Edison Inc
Pub Serv Enterp
SIM Portfolio:
• NRG Energy Inc.
• Southern Co.
Ticker
SO
EXC
D
DUK
NEE
FE
AEP
PCG
ED
PEG
Mkt CAP(B)
39.51
28.62
32.7
49.26
31.84
17.4
23.17
18.74
15.27
16.77
Overview: Sector Performance
Index
Name( Price
Returns)
Utilities Sector
S&P 500
1
Month
3
Month
YTD
3.85%
2.33%
7.16%
7.88%
9.26%
9.35%
Overview: Sector Performance
•
Utilities Sector(CIX: MSECTOR9)
Business Analysis
Business Analysis: Sector Life Cycle
Mature Phase
• Infrastructure and
products are well
established
• Growth is
stabilized
• High competition
among firms
Business Analysis: Business Life Cycle
• Utility sector is
considered a
defensive sector;
that is, it is
sustained by
common everyday
consumer use and
the performance of
the markets has little
bearing on it.
Business Analysis: External Factors
•
Weather Conditions
-Temperature change affects power generation and
demand
-Infrastructure damage and power outage concerns
•
Commodities Price Risk
-Change in price of raw materials
Business Analysis: Supply Factors
•
Regulation
- Environmental concerns
ex: Cross-State Air Pollution Rule (CSAPR)
- Rates
- NARUC is responsible for assuring reliable utility service at
fair, just, and reasonable rates
- Trend: Deregulation
•
Competition
- New energy such as solar and wind power
•
Commodities Price Risk
- Nature gas and fossil fuel volatility
- Affected by political and regulatory changes and technology
Business Analysis: Demand Factors
•
Households Demand
- increase as income grows
•
Commercial Sector Demand
- increase as the recovery of business activities
- moderating growth in developed economies
•
Industry Users Demand
- increase as the recovery of business activities
- decrease as energy efficiency campaign
Business Analysis: Geography
• Population Spread
• Utility sensitive industries
• Easy access to resources
Business Analysis: Five Forces Analysis
Threat of New Entrants
Power of
Buyers
• Low
Power of Suppliers
• Medium
Power of Buyers
Threat of
New
Entrants
Competit
ive
Rivalry
Power of
Supplier
s
• Medium
Threat of Substitutes
• Low
Competitive Rivalry
Threat of
Substitut
es
• High
Economic Analysis
Economic Analysis
Correlated Index
• S&P 500
• Natural Gas
• Oil & Gas Count
• Real GDP
• CPI
• Employment Rate
Economic Analysis: S&P 500
• Highly positive correlated
Economic Analysis: Natural Gas
• Highly negative correlated
Economic Analysis: Oil & Gas Count
• Highly negative correlated
Economic Analysis: Real GDP
Economic Analysis: CPI
Economic Analysis: Employment Rate
Financial Analysis
Financial Analysis: Revenue
• Historical growth rates is negative and decrease
• Long-term growth rates expected to be positive
Financial Analysis: EPS
Financial Analysis: ROE
Valuation Analysis
Valuation Analysis: Absolute Basis
Utilities Sector by Industry
Forward P/E
P/S
P/B
P/CF
Absolute Basis
Median
Current
Median
Current
Median
Current
Median
Current
12.7
15.5
0.5
0.5
1
1.1
5.1
6.2
18.7
20.6
1.1
1.1
2.6
2.6
9.7
10.2
20.9
21.5
3.3
4.3
2.4
3
11.2
15
12.8
15
1.4
1.7
1.5
1.5
6.5
7.1
13.4
16.4
1.1
1.7
1.6
1.7
6.4
7.6
Independent power
production
Gas Utilities
Water Utilities
Eletric Utilities
Multi-Utilities
• Valuation ratios vary across industries
• SIM portfolio holds stocks in Independent Power Production and Electric Utilities
• Holding: Expensive
Valuation Analysis: Relative Basis
Utitilies Sector by Industry
Forward P/E
P/S
P/B
P/CF
Relative Basis
Independent power
production
Median
Current
Median
Current
Median
Current
Median
Current
0.9
1.1
0.4
0.4
0.5
0.5
0.6
0.6
1.3
1.4
1.2
0.8
1.2
1.1
1
1
1.5
1.5
2.7
3.1
1.1
1.3
1.3
1.5
1
1
1.2
1.3
0.7
0.7
0.7
0.7
0.96
1.1
0.9
1.2
0.7
0.8
0.7
0.8
Gas Utilities
Water Utilities
Eletric Utilities
Multi-Utilities
• Independent Power Production & Electric Utilities: Inline
• Gas Utilities & Water Utilities: Expensive
Recommendation
Recommendation: Hold
• Reasoning:
– Recovery of overall economy
– Increasing Demand
– Mature sector
– Consistent Dividend
• Risks:
– Commodity prices increase: increase expense
– Regulation Risks
Recommendation: Future
• Avoid expensive industries: Gas Utilities &
Water Utilities
• Closely monitor inline industries:
Independent Power Production & Electric
Utilities
Q&A