Is Exelon Stock A Bargain Compared To Public Service Enterprise Group?

November 5th, 2020 by Trefis Team
EXC: Exelon logo
EXC
Exelon

Exelon (NYSE:EXC), one of the largest regulated electric utility companies and operators of nuclear power plants, trades at just about 1.2x trailing Revenues, considerably below Public Service Enterprise Group (NYSE:PEG), which operates New Jersey’s largest utility and trades at about 3x trailing Revenue. Does this make sense? While Exelon’s sizeable nuclear fleet appears to be an asset as decarbonization gathers pace, safety-related concerns, weakness in the electricity markets, and some controversy surrounding the company’s ComEd Illinois utility business have created an overhang on the stock. PEG, on the other hand, has benefited from an improving operational performance at its utilities while investors have rewarded the company for growing dividends. However, let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical Revenue Growth, Returns (ability to generate profits from growth), and Risk (sustainability of profits). Our dashboard Public Service Enterprise Group vs. Exelon: Is PEG Stock Appropriately Valued Given Its significantly higher P/S Multiple Compared to EXC? has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Between 2016 and 2019, PEG’s Revenue grew from around $9 billion to about $10.1 billion, an increase of about 12% driven by the Power generation business and steady growth at the utility business. On the other hand, EXC’s Revenues grew by about 10% between 2016 to 2019, rising from around $31.4 billion to $34.4 billion, driven by relatively steady growth at its rate-regulated utilities although the results of its competitive generation businesses remained volatile, as market prices for electricity declined due to weaker demand and lower natural gas prices.

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2. Returns (Profits)

While PEG’s Returns have been superior to EXCs, with its Free cash flows as a % of Revenues coming in at levels of over 30% over the last four years. EXC’s Free cash flows as a % of Revenues have declined from 27% in 2016 to about 19% currently. PEG’s Return on Invested Capital is higher than EXC’s and has also improved from about 4.5% to 6.9% between 2016 and 2019. EXC’s ROIC has risen from 2.1% to 4.7% over the same period. PEG’s Total Shareholder Returns have been higher, driven by an increasing stock price and steadily improving dividends. While Exelon has also raised its dividend 15% between 2016 and 2019, its stock has underperformed.

3. Risk

While EXC’s Debt load is higher with its Debt to Equity ratio standing at about 75% as of 2019, the metric has improved from about 111% in 2016, as the company reduced debt. PEG’s Debt to Equity ratio stood at about 51% as of 2019, roughly flat compared to 2016. Overall neither company appears to have meaningful financial risk.

The Net Of It All

While Exelon’s key Growth, Returns, and Risk metrics fall slightly behind Public Service Enterprise Group’s, we don’t think this really justifies the company’s depressed P/S multiple of just about 1.2x, versus 3x for PEG. Sure, weak power prices and issues at ComEd could be creating an overhang on the stock, but they are likely transitory in nature. That said, there are a couple of factors that could help Exelon stock in the near-to-medium term. Firstly, the company’s generation mix is largely skewed toward nuclear assets (over 60% of generation capacity) which makes the company the largest zero-carbon power supplier in the U.S. As environmental regulation gets more stringent, this could make the company’s assets more valuable. Secondly, the company is also exploring the possibility of spinning off its generation assets, separating them from its utility business. This could unlock meaningful value for shareholders.

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