Stock-pickers large and small routinely spend hours poring over numbers. But sometimes it only takes a few words from a local politician to move a stock price.
Such was the case last month when Illinois Gov. Rod Blagojevich vowed to block Exelon Corp. from raising rates at local utility Commonwealth Edison.
Chicago-based Exelon, which is in the process of trying to win approval for a merger to become the nation’s largest utility owner, now finds itself locked in a potentially messy battle with Blagojevich over its plan to buy power on the deregulated open market beginning in 2007. The change could see rates rise 20 percent or more after a nine-year price freeze.
Electricity deregulation requires that ComEd limit itself to distribution. In 2007, Exelon no longer will be required to sell its power to ComEd at regulated prices. So the utility must buy its power on the open market.
Investors have every reason to be concerned that the controversy could hurt the company’s stock price. Blagojevich’s recent jabs at Exelon dealt the company’s shares their steepest price decline in three years of an otherwise extraordinary run.
Even with its September pullback, which saw 17 percent of its value stripped away in about three weeks, Exelon’s stock is up an eye-popping 109 percent since the end of September 2002–easily outperforming the Dow Jones utilities index–and 16 percent since the beginning of the year.
In short, Exelon and other utilities have benefited from an industry that cleaned itself up after the Enron implosion and the California energy scandal of 2002. Some investors migrated to the sector seeking its relative safety while others have appreciated its high cash flows.
Investors should also realize that even if Exelon doesn’t win approval for its plan, any negative impact wouldn’t show up on the company’s financial statements until 2007.
Morgan Stanley energy analyst Kit Konolige wrote in a recent report that Exelon could still earn $4.50 to $5 a share in 2007 even if ComEd, which makes up about a quarter of Exelon’s revenues, went bankrupt, which the company has said would be a possibility absent the auction proposal.
Not bad for a firm forecast to earn about $3.11 a share for 2005.
Exelon’s strength comes from its nuclear power plants, which account for about 70 percent of its output and provide it with a comparatively cheap source of electricity.
Because many electricity companies rely on natural gas to power their plants, rates on the open market have risen as gas prices have soared. Exelon’s nuclear plants produce electricity at a much lower cost than gas plants, and the company has been able to reap profits selling about one-third of its power on the open market.
“Exelon’s margins have been excellent,” said Morningstar analyst Mark Sadeghian.
When Exelon reports its third quarter earnings on Wednesday analysts expect it to earn $1.05 per share, according to Thomson Financial, which would be up 15 percent from a year earlier. In the second quarter Exelon was able to beat by 3 cents Wall Street’s estimate of 72 cents per share for its second-quarter operating earnings, as compiled by Thomson.
But utilities are funny stocks. Though their financial performance is important, they are heavily impacted by interest rates. That’s because utilities are valued for their dividends. If long-term interest rates go up, it makes the dividends much less attractive.
So even as Exelon beat profit expectations last quarter, its stock dropped on word that China had allowed its currency to strengthen, thereby prompting a rise in the yield for T-bills.
Even if Exelon’s third-quarter results exceed estimates, the specter that Federal Reserve policymakers will again raise interest rates at their Nov. 1 gathering could hurt the stock.
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But Charlie Gaffney, lead energy analyst for the $900 million Eaton Vance Utilities Fund, cautions against putting too much weight on the direction of interest rates when deciding whether to invest in utilities.
Yes, it’s important, he said, given investor sentiments, but well-run utilities have too much going for them in an era of high gas and oil prices, the deregulation of electricity generation and the prospect of mergers and acquisitions. “The Fed has been raising rates for the last 18 months, and these stocks have been going up anyway,” he said.
Exelon’s earnings also stand to gain if it receives final government approval for its nearly $15 billion acquisition of New Jersey-based Public Service Enterprise Group.
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Leon Lazaroff is a staff reporter at the baiduhai. E-mail [email protected].