Is This Utility Still Cheap According to Graham?
In February, I spent some time dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. At the time, there were 56 companies that met these criteria. Now, after a couple months that have pushed prices down, as well as recent earnings releases, the list has swelled to 80 companies.
I have decided to take another look at some of these companies and will be making a CAPScall on most of these companies after comparing them to competitors and their current value in relation to their Graham numbers. Next up is massive utility Exelon (NYS: EXC) .
What is it?
Exelon is the largest provider of nuclear energy in the United States, with operations in 47 states, the District of Columbia, and Canada. It owns the capacity to produce 35,000 megawatts of electricity, which led it to be ranked as the number one utility on two separate lists published by leading financial publications. However, low natural gas prices have led many utilities to turn more toward natural gas as a provider of electricity, and its emphasis on nuclear power is still reeling from the negative perception of that power source.
What's it worth?
When I last took a look at some utilities, Exelon and CenterPoint Energy (NYS: CNP) were trading below their Graham numbers. Since then, Public Service Enterprise Group (NYS: PEG) joined the list as a comparably sized utility that is currently trading below its Graham number:
Book Value Per Share (MRQ)
|Public Service Enterprise Group||$2.89||$21.00||$36.95||$30.75|
|Duke Energy (NYS: DUK)||$1.12||$17.03||$20.72||$21.85|
|FirstEnergy (NYS: FE)||$2.72||$31.86||$44.16||$46.35|
Source: Yahoo! Finance and author's calculations. TTM = trailing-12-months; MRQ = most recent quarter.
Despite missing on revenue estimates, CenterPoint still met earnings estimates in its recently ended quarter. Like most utilities, it can be relied on for a nice dividend, though its current 4% yield pales in comparison to Exelon's current yield of 5.7%. On the other hand, Public Service Enterprise, the other utility on the list currently below its Graham number, greatly exceeded earnings estimates during its recent quarter. It is one of the most profitable companies on the S&P 500, and also sports a 4.6% yield.
Duke Energy rode a great earnings report to move slightly above its current Graham number after being slightly below at last look. It will also be bringing four new plants online in the near future: Two will burn natural gas while the other two will use some sort of coal. Finally, FirstEnergy missed on revenue while beating EPS estimates, and its current yield of 4.8% places it second behind Exelon in that important metric.
Utility stocks tend to be considered low-risk propositions since they provide the resources that people need to live their daily lives. Nevertheless, a utility company should not be purchased at any price. The Graham number is but one thing you can look at when valuing companies, and by this metric, Exelon is considered cheap. Therefore, I will be holding myself accountable on this call by continuing my "thumbs-up" over on my CAPS page.
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At the time this article was published Fool contributor Robert Eberhard holds no position in any company mentioned. Click here to see his holdings and a short bio or follow him on Twitter. Motley Fool newsletter services have recommended buying shares of Exelon, as well as creating a write covered strangle position in Exelon. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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