Is Exelon Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Exelon's (NYSE: EXC  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Exelon's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much Exelon's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Exelon's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Exelon managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Exelon's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Exelon's key statistics:

EXC Total Return Price Chart

EXC Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue Growth > 30%

21.1%

Fail

Improving Profit Margin

(74.2%)

Fail

Free Cash Flow Growth > Net Income Growth

(65.7%) vs. (51%)

Fail

Improving Earnings per Share

(56.2%)

Fail

Stock Growth + 15% < EPS Growth

(27.1%) vs. (56.2%)

Fail

Source: YCharts. * Period begins at end of Q3 2009.

EXC Return on Equity Chart

EXC Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving Return on Equity

(69.5%)

Fail

Declining Debt to Equity

(14.7%)

Pass

Dividend Growth > 25%

0%

Fail

Free Cash Flow Payout Ratio < 50% 

123.2%

Fail

Source: YCharts. * Period begins at end of Q3 2009.

How we got here and where we're going
Ouch. Exelon earns only one out of nine possible passing grades. Reducing debt levels are nice, but when virtually all other metrics are heading in the wrong direction, it's little consolation for investors after some consistent gains. Can Exelon turn it around?

Exelon's stock has been in a tailspin since the start of November as investors have fled in the wake of a terrible third-quarter-earnings report. The primary culprits were higher nuclear fuel costs, higher expenses, and a higher share count, which combined with lower uptime and lower energy prices to sap the utility's bottom line. Despite the weakness, Fool contributor Justin Loiseau points out in the above-linked article that Exelon remains one of the cheapest utilities on a price-to-book basis, with one of the lowest debt-to-equity ratios in the sector. Only Duke Energy (NYSE: DUK  ) matches Exelon in terms of debt levels, and only Northeast Utilities (NYSE: NU  ) matches it for price-to-book value. Since the start of November, Exelon's slid further than either of these peers, which makes its valuation more attractive still -- provided its long-term picture is clear.

Exelon's advantage, if you want to consider it an advantage, is its nuclear energy focus. Only Entergy (NYSE: ETR  ) boasts a similar level of nuclear capacity, but it's not as nuclear-centric -- only one-third of its energy is generated by nuclear plants, compared to two-thirds for Exelon. To diversify, Exelon's contracted with solar panel leader First Solar (Nasdaq: FSLR  ) to construct a mid-scale 16.1 megawatt facility in Maryland, and has also acquired two smaller utilities that will show up on the bottom line next year. That should help Exelon turn around a free cash flow dividend payout ratio that is too high, and which took a turn for the worse in the third quarter after settling back to a sustainable level during the spring and summer.

Ultimately, Exelon is going to be insulated from real financial danger by dint of its basic necessity business. Everyone needs electricity, and Exelon's got the size to ensure its continuation. However, this spate of lousy results should give investors pause before deciding to dive in. Exelon will almost certainly rebound, but right now, the signs are not in its favor.

Putting the pieces together
Today, Exelon has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

You're always on the lookout for great dividend stocks that will grow while they pay you back. The Fool's put together a list of nine top-flight dividend dynamos that can satisfy any dividend investor's needs. We've explained our reasoning for each one in an exclusive free report, which you can access for a limited time at no cost. Simply click here to find out more today. You'll be glad you did.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2012, at 9:33 PM, MNGPHR wrote:

    "To diversify, Exelon's contracted with solar panel leader First Solar (Nasdaq: FSLR ) to construct a mid-scale 16.1 megawatt facility"

    really? diversifying with a 16 MW plant. They own 34,650 MW of generation. if we were living in 1911 I might be impressed with a 16 MW plant

  • Report this Comment On November 14, 2012, at 9:49 PM, BMFPitt wrote:

    My nearly 2 year old owns some in his ESA, and over the next 16 years or so, I expect that the dividends alone will make this a good buy, even if it's down a bit right now.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2112997, ~/Articles/ArticleHandler.aspx, 11/21/2014 4:01:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement