utilities sector analysis - max m. fisher college of business wi12.pdf · telecom 3.53%. sim...
TRANSCRIPT
{Utilities Sector Analysis
Luke Friedman & Geno Frissora
Agenda
- Overview- Business Analysis- Economic Analysis- Financial Analysis- Valuation- Recommendations- Questions
Technology 21.22%
Financials 12.27%
Energy 11.13%
Health Care 13.19%
Consumer Staples 11.98%
Consumer Discretionary
7.46%
Industrials 9.78%
Utilities 3.34%
Materials 3.40%
Telecom 3.53%
SIM Weighting
Technology Financials
Energy Health Care
Consumer Staples Consumer Discretionary
Industrials Utilities
Materials Telecom
Technology19.60%
Financials14.11%
Energy11.92%
Health Care11.69%
Consumer Staples10.87%
Consumer Discretionary
10.83%
Industrials10.95%
Utilities 3.57%
Materials3.73%
Telecom2.73%
S&P Weighting
Technology Financials
Energy Health Care
Consumer Staples Consumer Discretionary
Industrials Utilities
Materials Telecom
SIM Weight vs. S&P Weight• Currently 23 basis points underweight
Utilities Overview
50.8%
32.9%
0.2% 8.6%
7.5%Industry Breakdown
Diversified Utilities
Electric Utilities
Foreign Utilities
Gas Utilities
Water Utilities
Industry Percentage Market Cap Diversified Utilities 50.8% 8,708.50 Electric Utilities 32.9% 5,637.80 Foreign Utilities 0.2% 35.10 Gas Utilities 8.6% 1,474.50 Water Utilities 7.5% 1,292.20 Total 100.0% 17,148.10
Utilities Overview
Company Ticker Market Cap (Billions) RankSouthern Co. SO 38.74 1Duke Energy DUK 28.6 2Dominion Resources Inc. D 28.4 3Exelon Corp EXC 26.55 4NextEra NEE 25.26 5American Electric Power AEP 19 6FirstEnergy Corporation FE 17.85 7Consolidated Edison ED 17.42 8Pacific Gas and Electric PCG 16.63 9Progress Energy PGN 16.09 10
$38.74
$28.60
$28.40
$26.55 $25.26
$19.00
$17.85
$17.42
$16.63 $16.09 Largest Utilities
SO
DUK
D
EXC
NEE
AEP
FE
ED
PCG
PGN
Performance by Sector
YTD 3 mon. 6 mon. 1 year 2 year 5 year 10 year
Energy 5% 2% 18% -1% 32% 23% 165%
Materials 13% 6% 20% -4% 27% -1% 76%
Consumer Staples 0% 3% 13% 10% 22% 22% 52%
Consumer Disc. 9% 7% 25% 9% 46% 7% 40%
Utilities -3% -1% 16% 9% 21% -8% 29%Technology 11% 6% 24% 4% 32% 26% 28%
Industrials 1% 10% 26% -1% 32% -4% 28%
S&P 7% 6% 21% 2% 25% -7% 19%
Health Care 4% 6% 20% 12% 16% 4% 9%
Telecom -2% 1% 10% 1% 23% -21% -18%
Financials 13% 9% 22% -13% 6% -61% -43%
Utilities Business Analysis
Product Life Cycle
Mature- Lowered Costs as a result of production volume- Higher Sales Volume- High Competition among firms
Utilities Business Analysis
External Factors
- Potential Supply Shortages- Commodity Price Fluctuations- Weather Conditions
- Ex. Temperature Changes affect power generation and supply
- Infrastructure Concerns- Damage to Utilities
production and distribution - Ex. Power Outages
Utilities Business AnalysisSupply Factors
- CO2 Emissions will influence future - EPA Regulations- Legislation – Cap and Trade for instance- Cross-State Air Pollution Rule (CSAPR)- Political Instability (Investment Decisions going forward)
- Cost of Commodities- Natural Gas and Fossil Fuels Volatility- Difficult to Predict and therefore represents an unknown
- Potential Competition- Alternative Energy Sources
- Ex. Solar and Wind- Political Influence
- Subsidies for alternative energy sources from Government
Utilities Business AnalysisDemand Factors
• Programs to reduce domestic demand• Advertising campaigns to limit energy use
•Moderating growth in developed economies• More energy efficiencies• More conservative use
• Strong growth in emerging economies• Could increase demand
Utilities Business Analysis
Strengths
• Strong dividend amongst most utilities companies• Steady growth with less volatility• Product necessity
Weaknesses
• Heavily regulated industry• Changes in technology• Aging infrastructure• Government intervention making international expansion difficult
Utilities Business AnalysisGeography and Users- Largely based on population
- Larger geographic areas have larger Energy Consumption- Areas with more manufacturing have higher consumption
9%7%
6%4%
4%4%
4%3%
3%3%
52%
Energy Consumption by StateTexas
California
Florida
Ohio
Pennsylvania
New York
Illinois
Georgia
North CarolinaMichigan
All other States
Utilities Business AnalysisFive Forces Analysis
Threat of New Entry (Low)- High Fixed Costs- Upfront Capital- Regulatory Approval- Brand Name Recognition is difficult to build
Supplier Power (Low)- Dominated by handful of firms- Significant power over generational companies- Leverage reduced due to wide spread of players (small
shares)
Buyer Power (High)- Power Treated as a commodity- Highly competitive pricing and service- Commercial buyers have significant leverage
Utilities Business AnalysisFive Forces Analysis (continued)
Substitutes (Low)- Power is a necessity, therefore little substitute- Power is inelastic, not much change due to price- No alternative to Natural gas, but alternative ways to
generate
Competitive Rivalry (High)- Very competitive- Fight for Market Share for economies of scale- Mainly competitive in the form of lowered prices- Profitability drops
Utilities Economic Analysis
Utilities Economic Analysis
Utilities Economic Analysis
Utilities Financial AnalysisRevenue Analysis
- Historically on the decline- Expected to Grow in near term
Utilities Financial AnalysisEarnings Analysis
- Historically starting to slow down- Expected to Grow in long term
Utilities Financial AnalysisReturn On Equity Analysis
- Historically decreasing last few years- Consistent Margins
Utilities Valuation Analysis
Absolute Basis High Low Median CurrentP/Trailing E 19.4 8.4 13.6 13.8P/Forward E 17.6 10.2 14.3 14.5P/B 2.5 1.1 1.6 1.6P/S 1.6 0.4 1.1 1.3P/CF 8.6 4.4 6.5 6.9
Relative to S&P High Low Median CurrentP/Trailing E 1.1 0.44 0.9 1.0P/Forward E 1.2 0.48 0.95 1.1P/B 1.0 0.4 0.7 0.7P/S 1.2 0.3 0.9 1.0P/CF 0.8 0.4 0.7 0.8
Utilities Valuation AnalysisPrice to Book Absolute (top) vs. Relative to S&P (bottom)
Utilities Valuation AnalysisPrice to Cash Flow Absolute
Utilities Technical Analysis
RecommendationIncrease 23 bp to equal weight with S&P
•Defensive sector with little volatility•Steady expected revenue growth•Good dividend stream •Good way to participate in the market in uncertain times
Potential Risks•Heavily regulated market•Aging infrastructure will need updated•Alternative energy sources could replace some demand
What questions do you have?