Utilities | Sector Analysis
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Utilities | Sector Analysis
Nihar ShahMichael Song
02.23.2010
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Recommendation
• Decrease weight in SIM portfolio by 72 bps
• Final: Underweight 150 bps
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Introduction
• Utilities Sector– Size: 1721.2B– Industries
Industry Market Cap P/E ROE % Div. Yield % Price to Book
Diversified Utilities 135.0B 11.5 13.00% 4.69% 1.84
Electric Utilities 301.6B 15.1 10.00% 3.95% 1.81
Foreign Utilities 1170.9B 86.0 1.60% 1.58% 1.98
Gas Utilities 104.3B 15.7 13.80% 3.99% 3.31
Water Utilities 9.5B 0.0 -5.20% 3.47% 1.75
Source: Yahoo Finance as of 2/23/10
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Largest Companies in (SPUT)
Company Market Cap Sales (in M) EPS 5 Yr Growth LT Growth ROE Yield ROE + Yield
SPUT 355.0 B N/A N/A 8.00% 5.00% 12.30% 4.60% 16.90%
EXC 29.5 B 17.32 B 4.09 10.00% 0.00% 22.90% 4.70% 27.60%
SO 25.9 B 15.74 B 2.07 3.00% 4.00% 13.00% 5.40% 18.40%
NGG 24.7 B 24.13 B 3.85 2.00% 7.00% 25.20% 4.60% 32.90%
DUK 21.40 B 12.73 B .83 -8.00% 4.00% 7.40% 5.80% 13.20%
FPL 19.40 B 15.65 B 3.97 12.00% 7.00% 13.60% 4.30% 17.90%
AEP 16.10 B 13.44 B 2.88 5.00% 4.00% 12.00% 4.90% 16.90%
FE 12.10 B 12.97 B 3.29 11.00% 3.00% 13.60% 5.50% 19.10%
EIX 11.00 B 12.54 B 2.59 10.00% 3.00% 11.30% 3.70% 15.00%
OKE 4.60 B 10.23 B 2.65 3.00% 10.00% 14.40% 4.00% 18.40%
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S&P/SIM Weight
(.78)%
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S&P/Sector Performance (YTD)
Outperform
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Business Analysis
Electric
Water GasForeignDiversified
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Utilities – Catalysts/Risks
• Catalysts– Rate Regulation Increase– Weather Patterns– Improvement in Economy– Green Policy (Nuclear/Water)
• Risks– Rate Regulation Neutral/Decrease– Inconsistent or over-demand– Commodity Prices– Green Policy (Electric/Diversified/Gas)
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Industry vs Sector Performance
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Sector vs S&P Performance
Historical Prices
0
50
100
150
200
250
Jan-00
May-00
Sep-00
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
Sector S&P
Correlation: 80.93%
Outperform Outperform
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Economic Analysis
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Economic AnalysisUnemployment vs GDP
12,200
12,400
12,600
12,800
13,000
13,200
13,400
13,600
Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10
GD
P
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Une
mpl
oym
ent
Real Gross Domestic Product Unemployment Rate
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Economic Analysis
Change in GDP vs Sector Price
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
Aug-87 May-90 Jan-93 Oct-95 Jul-98 Apr-01 Jan-04 Oct-06 Jul-09 Apr-12
% C
hang
e in
GD
P
-30
-20
-10
0
10
20
30
40
% C
hang
e in
Sec
tor
Real Gross Domestic Product EXC.S
Forecast: GDP will very slowly increase over the short term
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Economic AnalysisRelative Strength of Utility Sector vs S&P 500
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Aug-87 May-90 Jan-93 Oct-95 Jul-98 Apr-01 Jan-04 Oct-06 Jul-09 Apr-12
S&P 500 Rel Str
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Economic Analysis
Forecast: Interest Rate will increase in the short term
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Economic Analysis
EXC.S vs OIL (USO)
R2 = 0.4733
0
20
40
60
80
100
120
100 120 140 160 180 200 220 240
Utility Sector Price (EXC.S)
Oil
ETF
Pric
e (U
SO)
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Economic Analysis
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Economic Analysis
EXC.S vs Natural Gas (UNG)
R2 = 0.7701
010203040506070
100 120 140 160 180 200 220 240
Utility Sector Price (EXC.S)
Nat
ural
Gas
ETF
Pri
ce
(UN
G)
Forecast: Natural Gas Price will stay relatively constant in the short term
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Economic Analysis
EXC.S vs Coal (KOL)
R2 = 0.7565
010203040506070
100 120 140 160 180 200 220
Utility Sector Price (EXC.S)
Coal
EFT
Pri
ce (K
OL)
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Economic Analysis
Forecast: Potential for long term growth
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Regulation• State commissions are responsible for determining utilities’ proper rate bases and allowable
operating expenses. Individual states’ rulings often differ with regard to these determinations. They also differ in allowed accounting treatments for depreciation accruals and investment tax credits. Although rulings are often presumed to be based solely on the public interest, commissions actually seek to provide a balance between investor and consumer interests.
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Green Policy (Update)• On June 26, 2009, the House of Representatives passed, by a
narrow 217–205 margin, its version of a new energy bill, H.R. 2454. Included in the bill, called the American Clean Energy and Security Act, 2005–2050, were provisions for a cap-and-trade system that would incrementally reduce GHG emissions, beginning with a cap on 2012 emissions that is 3% below 2005 levels. The bill, whose principal sponsor was Henry Waxman (D.–California), also included a requirement that utilities get 15% of their electricity from renewable energy sources and, through increasing their energy efficiencies, reduce their electricity use 5% by 2020. Individual states, however, would be allowed to vary these two percentages as long as the total came to 20%.
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Financial Analysis
Sector
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Financial Analysis
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Margins
Net ProfitN/A
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Summary
Analysis Conclusions View
Business Mature industry, cyclical in nature Neutral
Economic Expect slow growth Slightly Negative
Financial Declining Revenue, stable profit margin stable ROE, and declining Net Profit Margin.
Negative
Valuation Sector seems to be trading at a slight discount.
Slightly positive
Overall: Slightly negative for short term
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Recommendation
• Decrease weight in SIM portfolio by 72 bps
• Final: Underweight 150 bps
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Questions