JJeff Sleasman
Manqing Zhao
Zhen Zeng


Overview
Discussion of stock
◦
◦
◦
◦
Business Analysis
Financial Analysis
Valuation
Recommendation




Market cap for
Utilities is $410.9B
Second-smallest
in the S&P
Up 1.05% on QTD
U 7.83%
Up
7 83% YTD


Electric utilities dominate the sector.
55% among whole sector.
H d
Hydroelectric
l t i
Percent of Sector
3.0%
0 4%
0.4%
Conventional
Hydroelectric
H
dOther
l t i
Pumped
0.003
Renewables
0.062
Diversified
Utilities
9 6%
9.6%
Oth
Other
0.041
Storage
-0.001
Coal
Nuclear
0.449
0.196
Electric Utilities
31.7%
Foreign Utilities
Natural Gas
0 238
0.238
Gas Utilities
55.2%
Water Utilities
Other Gases
0.003
Petroleum
Petroleum
0.003
0.006
Coke
Liquids
Recommendation:
 PEG: Hold
 AWK: Do not buy
 ETR: Do not buy

(AWK and ETR are currently not in our portfolio)



Low Growth
Low Profit Margin
f
Low beta – diversification



Low growth
Decreased capital expenditure
Q3 report: increased dividend, revenue;
positive
i i guidance
id
– already
l
d reflected
fl
d on the
h
stock price




Current SIM: 2.43%
Market Cap: $16.16B
Current Price: $31.07
52-week Range: $27.97 - $34.22

Segments
◦ PSE&G: NJ-based regulated public utility
◦ PSEG Power: electricity supply in NE and Mid
MidAtlantic
◦ PSEG
S G Energy Holdings:
ld
owns energy generation and
d
related passive investments

Northeast/Mid-Atlantic Utilities
◦ 2.1m electric & 1.7m natural gas customers



Defensive (0.54 beta), but sensitive to
economic activity in general
High dividend yield: 4.28%
Low debt: 44.2%
44 2% debt-to-cap
debt to cap (vs
(vs. industry
avg 68%)

Risks:
◦ Highly-regulated
 Dependent on regulators for rate relief and rules
◦ Participation in wholesale energy market exposes
PSEG to price volatility
◦ Pending lawsuit with Dynegy

Earnings History & Estimates
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to S&P
500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
22.8
19.0
3.6
2.0
13.6
8.3
6.8
1.4
0.6
4.6
12.1
11.5
2.2
1.3
7.1
10.0
12.7
1.7
1.4
6.1
High
Low
Median
Current
1.4
1.3
1.5
1.6
1.3
0.43
0.39
0.5
0.5
0.4
0.72
0.76
0.8
0.9
0.7
0.72
0.93
0.8
1.1
0.6
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF

High
Low
Median
Current
B.
C.
6.8
0.6
14
1.4
2.51
4.6
D.
11.5
1.3
22
2.2
4.49
7.1
E.
12.7
1.4
17
1.7
3.86
6.1
19
2
36
3.6
8.42
13.6
A
Average:
$35.78
$35 78
#Your
g
Target
Multiple
F.
11.5
1.3
22
2.2
4.49
6.5
*Your
g E,
Target
S, B,
etc/Share
G.
2.7
24.28
19 94
19.94
8.26
5.99
Your
g
Target
Price
(F x G)
H.
31.05
31.564
40 27
40.27
37.11
38.9
Year
2011E
Revenue
% Growth
12,070
2012E
12,586
2013E
13,268
4.3%
Operating Income
Operating Margin
2,475
Interest and Other
Interest % of Sales
(483)
2,452
20.5%
Taxes
Tax Rate
814
1,285
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
NPV off Cash
C h Flows
Fl
NPV of terminal value
Projected Equity Value
822
1,221
1,234
1,668
40.0%
1,710
555
4.6%
604
4.8%
637
4.8%
662
4.8%
643
4.5%
618
4.2%
606
4.0%
623
4.0%
638
4.0%
654
4.0%
671
4.0%
(789)
-6.5%
362
3.0%
122
1.0%
396
3.2%
186
1.4%
438
3.3%
(121)
-0.9%
483
3.5%
(110)
-0.8%
528
3.7%
(97)
-0.7%
574
3.9%
(100)
-0.7%
606
4.0%
(94)
-0.6%
623
4.0%
(88)
-0.6%
638
4.0%
(90)
-0.6%
654
4.0%
(92)
-0.6%
671
4.0%
872
1,450
66.1%
1,500
3.5%
1,365
-9.0%
1,374
0.7%
1,464
6.5%
1,476
0.8%
1,523
3.2%
1,567
2.9%
1,606
2.5%
1,646
2.5%
Terminal Value
24,104
Free Cash Yield
6.83%
Terminal P/E
14.1
7.8
8.9
7.4
8.5
Shares Outstanding
506
Working Capital % of Growth
1,628
40.0%
2.5%
7.9
9.0
Debt
Cash
Cash/share
Total Assets
Debt/Assets
40.0%
-5.0%
1,140
2.5%
Current EV/EBITDA
Projected EV/EBITDA
Upside/(Downside) to DCF
1,588
1,112
2.5%
12.7
15.4
37.59
40.0%
(838)
-5.0%
2.8%
12.9
15.6
31.07
(818)
22.0%
3.0%
12.2
14.8
$
1,545
22.0%
-5.0%
1,085
2.50%
3,688
9.4%
51%
100%
$
1,500
40.0%
3,598
(798)
1,059
16,765
2.50%
22.0%
-5.0%
2021E
3.5%
49%
Implied equity value/share
1,371
40.0%
3,511
(778)
1,030
16,356
2.50%
22.0%
-5.0%
2020E
7.4%
9,726
19,021
Current Price
1,325
40.0%
3,425
(758)
1,000
15,957
2.75%
22.0%
-5.0%
2019E
1.0%
5.55%
Current P/E
Projected P/E
40.0%
3,333
(736)
914
15,568
3.00%
22.0%
-5.0%
2018E
-5.0%
9 295
9,295
Free Cash Flow Yield
883
15,151
3,236
(714)
2017E
3.00%
21.0%
-5.0%
40.0%
14,710
2,999
(690)
2016E
3.5%
21.0%
-5.0%
40.0%
14,282
2,898
(663)
2015E
4.0%
19.4%
-4.5%
40.0%
Net Income
% Growth
2,569
(566)
857
13,799
5.4%
19.5%
-4.0%
2014E
21 0%
21.0%
9,014
900
1.78
29,370
30.7%
22%
Terminal
EV/EBITDA
7.4



Multiples Valuation: $35.78
DCF Valuation: $37.59
Weighted Average (35/65) = $37
◦ Analyst
l
Estimates $3
$35-$39
$39
Avg = $3
$35.54

Upside: 19%
Total Return: 23.28%
23 28%

Recommendation: HOLD at 2
43%
2.43%


Entergy Co.
Entergy Corporation
is an integrated
C
d energy company
engaged primarily in electric power production and
retail distribution operations.

•
•

•
•
•
•
B i
Business
segment:
Utility
Entergy Wholesale Commodities
Market Data:
Market Cap (USD): 10.88B
Share outstanding: 176
83m
176.83m
Div Yield: 5.39%
52 Week Price Range: 57.6-80.8
Electric
segment:
Entrants: Low
Nuclear segment:
g
ETR take the second large (9%)
market share
industry Price of uranium is a
of the industry.
significant driver for this segment.
Demand:
Moderate
Supplier:
Medium
Rivalry: Low
Substitute: Low
The business is
quiet mature, and
the threat are
overall low.
5yr
ETR consistently
perform better
than the market
in last four years.
However,, it
continuously
decreasing the last
year.
1yr
Net income increased by about .01 billion
each year though revenue fluctuate low and
high.

ROE
Absolute basis analysis:
Average: 74.5
Medium: 72
6
72.6
On the absolute level, the current ratio is far below the 22-year
median and even closer to low. We conclude that this stock is
still
ll cheap
h
which
h h means underpriced.
d
d
Relative basis analysis:
Entergy Corporation is underpriced when comparing with both
industry and S&P500. The current price are a little bit more closer
to the median relative to S&P500, and all those ratios are drop
down to the low relative to the industry (all ratios are equal to the
low except P/B ratio).

Sensitivity of the stock price:
We choose Discount Rate at 9
5%
9.5%
Terminal Growth Rate at 2.5%.
Do not buy
 Strength:
•
More and more demand from
nuclear power may increase
company revenue.
 Weakness:
•
•
•
Low g
growth rate comparing
p
g
to the market
Continuously decreasing in
stock price
through
p
g out the
year
Not a good choice for
hedging
g g
Current Price ($):
61 55
61.55
Target Price ($):
71.16
Upside/downside:
Upside/downside:
15.6%
Entergy Corporation
Analyst: Zhen Zhen
Date: 2011-7-11
Year
Revenue
2011E
11,533,653
% Grow th
Operating Income
Operating Margin
Terminal Discount Rate =
Terminal FCF Growth =
2012E
11,575,323
0.4%
2,253,676
2,133,332
2013E
11,640,729
0.6%
2,097,659
19.5%
18.4%
18.0%
Other income
%of sales
186,252
1.6%
185,205
1.6%
196,072
1.7%
Interest and Other
612,437
614,650
618,123
Interest % of Sales
Preferred dividend
requirements of
subsidiaries
%of sale
Taxes
Tax Rate
Net Income
5.3%
20,088
0.2%
587,939
32.0%
1,229,283
% Grow th
Add Depreciation/Amort
% off Sales
S l
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
1,153,365
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
Current Price
$
Implied equity value/sha $
p
(
) to DCF
Upside/(Downside)
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Gro
20,088
0.2%
545,244
32.0%
1,138,556
5.3%
20,088
0.2%
533,052
32.0%
1,112,648
11,757,136
1.0%
2,057,499
17.5%
191,641
1.6%
624,304
5.3%
23,514
0.2%
519,948
32.0%
1,081,374
2015E
11,898,222
1.2%
2,082,189
17.5%
193,941
1.6%
631,796
5.3%
23,796
0.2%
526,187
32.0%
1,094,351
2016E
12,076,695
1.5%
2,113,422
17.5%
196,850
1.6%
641,273
5.3%
24,153
0.2%
534,080
32.0%
1,110,766
2017E
12,294,076
1.8%
2,151,463
17.5%
200,393
1.6%
652,815
5.3%
24,588
0.2%
543,693
32.0%
1,130,760
2018E
12,539,957
2.0%
2,194,493
17.5%
204,401
1.6%
665,872
5.3%
25,080
0.2%
554,567
32.0%
1,153,375
2019E
12,815,837
2020E
13,110,601
2.2%
2,242,771
2.3%
2,294,355
17.5%
208,898
17.5%
213,703
1.6%
680,521
1.6%
696,173
5.3%
25,632
5.3%
26,221
0.2%
566,768
0.2%
579,803
32.0%
1,178,749
32.0%
1,205,861
2021E
13,438,366
2.5%
2,351,714
17.5%
219,045
1.6%
713,577
5.3%
26,877
0.2%
594,298
32.0%
1,236,007
-7.4%
-2.3%
-2.8%
1.2%
1.5%
1.8%
2.0%
2.2%
2.3%
2.5%
1,215,409
1,427,787
1,509,587
1,536,759
1,567,495
1,601,980
1,638,825
1,679,796
1,280,480
1,352,071
10 0%
10.0%
10 5%
10.5%
11 0%
11.0%
11 5%
11.5%
12 0%
12.0%
12 5%
12.5%
12 5%
12.5%
12 5%
12.5%
12 5%
12.5%
12 5%
12.5%
12 5%
12.5%
-23,240
-8,842
-13,879
0
-28,556
-36,230
-44,259
-50,160
-56,390
-60,309
-67,192
-0.20%
-0.08%
-0.12%
0.00%
0.24%
0.30%
0.36%
0.40%
0.44%
0.46%
0.50%
1,787,716
1,723,137
1,672,380
1,645,999
1,606,260
1,509,587
1,536,759
1,567,495
1,601,980
1,638,825
1,679,796
15.50%
15.00%
14.50%
14.00%
13.50%
12.50%
12.50%
12.50%
12.50%
12.50%
12.50%
775,975
782,460
832,926
878,756
951,636
1,085,791
1,100,250
1,118,798
1,139,877
1,164,287
1,189,689
0.8%
6.4%
5.5%
8.3%
14.1%
1.3%
1.7%
1.9%
2.1%
2.2%
6,207,201
7,029,395
13,236,596
6.78%
47%
53%
100%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
5.3%
2014E
9.5%
2.5%
9.3
10.8
3.4
3.9
186,010,452
61.55
71.16
15.6%
12,017,700
1,294,472
6.96
38,685,276
31.1%
20%
Terminal Value
Free Cash Yield
10.1
11.6
3.4
4.0
10.3
11.9
3.4
3.9
17,420,441
6.83%
Terminal P/E
14.1
Terminal EV/EBITDA
7.0