Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – February 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Exelon Corporation (EXC)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Exelon Corporation 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. Generationâ€™s integrated business consists of its owned and contracted electric generating facilities and investments in generation ventures that are marketed through its customer-facing activities. ComEdâ€™s energy delivery business consists of the purchase and regulated retail sale of electricity and the provision of transmission and distribution services to retail customers in northern Illinois. PECOâ€™s energy delivery business in southeastern Pennsylvania and BGEâ€™s in central Maryland.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$31.93|
|Value Based on 0% Growth||$18.72|
|Market Implied Growth Rate||3.45%|
|Net Current Asset Value (NCAV)||-$59.88|
Balance Sheet – DecemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Exelon Corporation is not suitableÂ for the Enterprising Investor orÂ for the Defensive Investor. Â The Defensive Investor is concerned by the the low current ratio, and the insufficient earnings growth over the last ten years.Â The Enterprising InvestorÂ is concerned by the level of debt relative to the current assets. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities at this time. Â From a valuation side of things,Â the company appears to be overvaluedÂ after seeing its EPSmg (normalized earnings) drop from $3.90 in 2010 to $2.20 for 2014. Â This level of demonstrated lack of growth doesn’t support the market’s implied estimate of a 3.45%Â annualÂ earnings over the next 7-10 years, leadingÂ the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out previous ModernGraham valuations of Exelon Corporation (EXC)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Exelon Corporation (EXC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Exelon Corporation (EXC)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.