Exelon Stock Looks Like Great Value Compared To NextEra Energy

NEE: NextEra Energy logo
NEE
NextEra Energy

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, compared to over 7x for NextEra Energy (NYSE: NEE) which operates Florida’s largest utility and is also one of the world’s largest producers of solar and wind power. Does this make sense? While NextEra has benefited from its fast-growing renewables business and exposure to the Florida electric utility market, which provides a favorable regulatory environment, Exelon is being weighed down by controversy surrounding the company’s ComEd utility business in Illinois and weakness in the electricity markets. However, there is more to the comparison. 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 NextEra Energy vs. Exelon: Is NEE 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, NEE’s Revenues grew by about 20%, rising from around $16.1 billion to $19.2 billion, driven by the acquisition of Gulf Power – a utility that serves parts of northwest Florida, and modest growth at the company’s Renewables generation business and the Florida Power & Light utility. 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.

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

2. Returns (Profits)

While NEE’s Free cash flows as a % of Revenues stood at about 42% in 2019,  rising from around 39% in 2016, EXC’s Free cash flows as a % of Revenues stood at about 22%, up from around 14% in 2016. While the Return on Invested Capital metric for both companies has been volatile, NEE’s ROIC was slightly lower compared to EXC’s in 2019, standing at about 4.1% versus about 4.7%. NEE’s Total Shareholder Returns (TSR) have been higher, driven by a surging stock price and growing 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 it reduced debt. NEE’s Debt to Equity ratio has declined from 50% to about 32% over the same period. Overall, neither company appears to have very meaningful financial risk.

The Net Of It All

Although NextEra’s Revenue Growth, Returns, and Risk metrics compare quite favorably with Exelon’s, we don’t think this really justifies the company’s high P/S multiple of 7.6x versus 1.2x for Exelon. NextEra’s valuation is being driven by investor interest in its large base of renewable assets and relatively bright prospects for its Florida utility. On the other hand, Exelon’s valuation is likely weighed down by safety concerns and weak power prices related to its nuclear fleet and the recent controversy at its ComEd utility. However, these issues could be transitory in nature and we do see a couple of factors that could help Exelon stock in the near-to-medium term. Firstly, the company’s large base of nuclear assets (over 60% of generation capacity) which make it 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 also unlock value for shareholders.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus about 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams