ModernGraham Valuation: Exelon Corp (EXC)


Company Profile (obtained from Google Finance): Exelon Corporation (Exelon) is an energy provider and holding company for several energy businesses. Exelon is engaged in the energy generation business through its Exelon Generation Company, LLC (Generation) subsidiary; wholesale and retail energy sales through its Constellation business unit, and the energy delivery business through its Baltimore Gas and Electric (BGE), Commonwealth Edison Company (ComEd) and PECO Energy Company (PECO) subsidiaries. It operates in 47 states, the District of Columbia and Canada. Exelon Generation has approximately 35,000 megawatts of owned capacity. Constellation provides energy products and services to approximately 100,000 business and public sector customers and approximately 1 million residential customers. Exelon’s utilities deliver electricity and natural gas to more than 6.6 million customers in central Maryland, northern Illinois and southeastern Pennsylvania. On March 12, 2012, Constellation Energy Group, Inc. merged into Exelon.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0 *Rare situation. See conclusion.
MG Opinion Overvalued
Value Based on 3% Growth $37
Value Based on 0% Growth $22
Market Implied Growth Rate 1.02%
Net Current Asset Value (NCAV) -$55.61
PEmg 10.54
Current Ratio 1.33
PB Ratio 1.05

Balance Sheet – 9/30/2013 

Current Assets $9,951,000,000
Current Liabilities $7,507,000,000
Total Debt $18,570,000,000
Total Assets $79,661,000,000
Intangible Assets $2,625,000,000
Total Liabilities $57,609,000,000
Outstanding Shares 857,000,000

Earnings Per Share – Diluted

2013 (estimate) $1.91
2012 $1.43
2011 $3.75
2010 $3.87
2009 $4.09
2008 $4.10
2007 $4.03
2006 $2.35
2005 $1.40
2004 $2.75
2003 $1.21
2002 $2.57

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $2.56
2012 $3.07
2011 $3.92
2010 $3.89
2009 $3.67
2008 $3.28


Exelon Corp presents a rare situation where the ModernGraham valuation model returns a valuation of $0.  The earnings history of the company simply does not support a positive valuation, after having shrunk EPSmg (normalized earnings) from $3.28 in 2008 to an estimated $2.56 for 2013.  Since the valuation model relies heavily on earnings, that lack of growth bodes very poorly for the company.  It is possible the company is actually worth more than $0, but any value would have to come from the balance sheet itself and the balance sheet doesn’t seem to provide much indication of value either (the Net Current Asset Value is significantly negative).  As for the Defensive Investor and the Enterprising Investor, the company’s current ratio and poor earnings history eliminate Exelon from contention for investment by either investor type.  As a result, any investor seeking to purchase Exelon Corp. should do considerable further research to determine whether the company is suitable for investment, while keeping in mind the 7 Key Tips to Value Investing.

What do you think?  Is Exelon Corp overvalued?  Is the company not suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Exelon Corp at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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