Thursday, October 29, 1998
Peco Energy
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Phone: (215) 841-4000
Website: www.peco.com
Price (10/28/98): $38 1/4
HOW DID IT DOUBLE?
It's not every day that we highlight a utility stock in this feature. With interest rates falling and fears of deflation mounting, it only makes sense that the defensive utility sector with its relatively high dividends and steady profits would fly. Call it a flight to safety in earnings. The Dow Jones Utility Average is reaching new highs, in fact.
The result for investors in Peco Energy? A normally quiet stock has gone nuclear.
BUSINESS DESCRIPTION
Formerly named Philadelphia Electric, Peco Energy is one of the largest utility companies in the nation and is the primary source of electric power for 1.5 million customers in the greater Philadelphia area. Peco also distributes natural gas to 379,000 customers in the region.
One of Peco's newest businesses is a joint venture with British Energy named AmerGen. The joint venture is looking to purchase and operate troubled nuclear power plants, such as Three Mile Island, using Peco's expertise to turn them around.
The company is a component of both the S&P 500 and the Dow Jones Utility Indexes.
FINANCIAL FACTS
Income Statement
12-month sales: $6443 million
12-month income: $425 million*
12-month EPS: $1.82*
Profit Margin: 6.6%
Market Cap: $8,522.1 million
(*Excludes charges)
Balance Sheet*
Cash: $105.3 million
Current Assets: $1,000.6 million
Total Assets: $12,388.3 million
Current Liabilities: $1,750.9 million
Long-term Debt: $3,593.7 million
(*As of June 30, 1998)
Ratios
Price-to-earnings: 21
Price-to-sales: 1.3
Dividend Yield: 2.6%
HOW COULD YOU HAVE FOUND THIS DOUBLE?
In a deflationary environment, companies with steady or growing earnings are going to be valued the highest. The power industry, by its very nature, lends itself to comparatively stable prices regardless of economic pressures. This spells good news for just about all utility stocks, Peco included.
Furthermore, utility companies such as Peco have been immune to the currency problems plaguing many other companies in the S&P 500 because their business is essentially only domestic. The currency problem itself has been around for several quarters, but is just now showing up in earnings results for companies with significant exports.
Lower interest rates have been predicted by a flattening of the yield curve for some time now, and lower rates help increase the value of all utility stocks. Falling rates increase the present value of discounted cash flows from any given company, raising the intrinsic value. The increase in the market value of Peco's relatively steady, annuity-like earnings and cash flow is perfectly logical, especially since Peco has over $5 billion in deferred Competitive Transition Charges yet to be collected from customers.
Throw in Peco's aggressive maneuvering to take advantage of the coming deregulation in its markets, and you've got all the ingredients needed to move a stock north.
WHERE TO FROM HERE?
Just as Peco has been helped tremendously by lower interest rates, higher interest rates could cause the stock to melt down in a relatively short time. Likewise, Peco should continue to be electrically charged should interest rates continue their downward trend. The utility sector is sensitive enough to interest rates that the Dow Jones Utility Index is often looked at as a leading indicator of where rates are headed.
The electric utility industry is also about to experience the full force of deregulation in the next few years, and it is uncertain how the cards will fall. Peco is making a huge bet on nuclear power generation through its acquisitions, and it is hard to tell how successful this venture will be. If things go Peco's way, the company could have a significant number of nuclear plants across the country bringing handsome returns to shareholders. On the other hand, Peco could just be buying the problems of other utilities when they take over the keys to these older plants.
The company has significantly cut its dividend to funnel money towards expansion, most notably buying nuclear power plants on the cheap. In addition, Peco's CEO has said that they plan to almost triple the company's generating capacity to 25 gigawatts within the next five years -- no small feat. One thing is certain -- this isn't your mother's sleepy utility stock anymore.
-Paul Larson
([email protected])