Utilities Sector
Zhen Zeng, Manqing Zhao, Jeff Sleasman
Outline
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Utilities Overview
Business Analysis
Economic Analysis
Financial Analysis
Evaluation Analysis
Recommendation
Utilities Overview
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Market cap for
Utilities is $410.9B
Second-smallest
in the S&P
Up 1.05% on QTD
Up 7.83% YTD
Utilities Overview
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Makes up 2.38% of SIM
Makes up 3.38% of S&P 500
Underweight 1.00%
Only holding: Public Service Enterprise Group
Utilities Overview
Largest Industries
Market Cap
Hundred Billion
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Percent of Sector
$8
3.0%
$7
0.4%
$6
9.6%
$5
31.7%
$4
Diversified Utilities
Electric Utilities
$3
Foreign Utilities
$2
Gas Utilities
$1
Water Utilities
$0
Diversified
Utilities
Electric
Utilities
Foreign Gas Utilities Water
Utilities
Utilities
55.2%
Utilities Overview
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Largest S&P Utilties Companies
Market Cap (Billions of US$)
Southern Co
Exelon Corp
Dominion Resources Inc
Duke Energy Corp
NextEra Energy Inc
FirstEnergy Corp
American Electric Power
Spectra Energy Corp
PG&E Corporation
Public Service Enterprise Grp
$-
$10
$20
$30
$40
Business Analysis
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Life Cycle: Mature
Business Analysis
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Demand Factors
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Household Demand for Utilities
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Industry Demand for Utilities
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Indicator increasing as manufacturing and industrial activity recover.
Especially of note is aluminum smelting, which is a heavy power user
Regulation
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Indicator increasing slowly as number of households increases coming
out of the recession
Further regulation expected to discourage CO2 output
Technology
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Smart grid advancements could even out demand
Business Analysis
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Supply Factors
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Cost of Fossil Fuels and Natural Gas
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Cost of Clean Energy and Renewables
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Wind and solar costs decreasing
Nuclear uncertain: clean energy vs. safety concerns
Cost of Water Supply
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Fossil fuels costs increasing, but cost of natural gas decreasing as there
is more availability
Differs geographically
Capital Costs
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Very strong need for investment in infrastructure
Business Analysis
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Sector Structure
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Industry Outlook & Geography
Business Analysis
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Five Forces Analysis
• Barriers to Entry:
High
• Competition: Low
• Buyer Power: High
• Supplier Power:
Medium
• Substitutes: Low
Economic Analysis
Economic Analysis
Economic Analysis
Economic Analysis
Economic Analysis
Economic Analysis
Other Renewables
0.041
Hydroelectric Conventional
0.062
Hydroelectric
Pumped Storage
-0.001
Other
0.003
Nuclear
0.196
Other Gases
0.003
Coal
0.449
Natural Gas
0.238
Petroleum
Coke
0.003
Petroleum Liquids
0.006
Economic Analysis
Financial analysis
Earning
P/E
Revenue
 Current P/E: 13.5; Market P/E: 14.
 Earning and Revenue: slightly declining.
Financial analysis
ROE slightly
decrease in these 5
yrs.
Margins goes
better slightly.
Margin to SP500
Indicates:
Margins of the
market is
increasing more
dramatic than
this sector.
Financial analysis
Valuation analysis---General
Sector:
utilities
industry: Water utilities
Electric utilities
Gas utilities
Company: PEG
AWK
ETR
P/E (trailing)
P/E (forward)
P/S
P/B
P/CF
Current Median Current Median Current Median Current Median Current Median
13.5
13.6
14
14.3
1.2
1.1
1.5
1.7
6.6
6.3
22.5
26.7
20.8
23.9
3.3
3.4
2.4
2.7
11.5
13
12.7
13.1
13.3
14
1.4
1.3
1.5
1.7
6.5
6.2
26.6
15.8
25.3
16.1
0.7
1
3
2.1
11.4
7.3
10.4
12.1
13.2
11.5
1.4
1.3
1.7
1.2
6.3
7.1
18.4
16.7
17.1
15.6
1.9
1.6
1.2
0.9
8.1
6.7
9.6
13.4
10.5
13.6
1.1
1.4
1.4
1.7
4.1
6.8
Electric dominate the sector’s ratio trends.(Ratios between industries are
quiet different).
Ratios with company in different industries show large differences, while
ratios are comparatively similar when the company in same industry.
Valuation analysis---Sector
Generally saying,
Utility sector is slightly
cheap on absolute basis
but expensive related
to S&P500.
 P/CF ratio in both
forms shows higher
than the median.
Trailing P/E
Forward P/E
Valuation analysis---Sector Con’t
P/S
P/B
P/CF
Recommendation
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Hold
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Demand is increasing slowly
Supply is stable
Earning is expected to be down in 2012 and then goes up
in 2013
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Low risk – risk diversification for portfolio
Other sectors generally have a higher risk