Please ensure Javascript is enabled for purposes of website accessibility

Will Natural Gas Save Exelon Stock in 2013?

By Justin Loiseau - Apr 17, 2013 at 3:43PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Can nuclear push profits for your Exelon stock?

With Q1 results around the corner, it's time for investors to size up their stocks. Exelon's (EXC 0.39%) shares have risen 23% in the past three months, but does it have what it takes to keep pulling profits? Let's take a look at the utility's finances, fair value, and future to decide whether Exelon stock has what it takes to electrify your earnings.

Nuclear dividends
Investors can't mention Exelon without mentioning nuclear. The utility has bet big on nuclear power, and is the largest nuclear plant owner and operator in the United States. The energy fuels 55% of Exelon's total capacity, followed by 28% from natural gas.

Source: Exelon Investor Relations Website 

FirstEnergy (FE -0.21%) is a nuclear runner-up, with four reactors producing nearly one-third of the utility's total energy. But unlike Exelon, FirstEnergy generates around two-thirds of its electricity from coal, with small slices of natural gas, oil, and renewables.

Exelon stock's delicious dividend is what brings most investors to its doorstep, but don't be surprised when its current 6% yield drops to around 3.6% in Q2. The company announced during its last earnings report that it would shave 40% off its dividend to keep its balance sheet strong and investor-friendly and clear up funds for new growth opportunities. I'm inclined to agree with Exelon's decision to cut its oversized dividend and, if Exelon stock returns are any indicator, Wall Street also gave the utility its seal of approval.

Atlantic Power (AT) also announced a dividend haircut this past quarter, but it may have been too little, too late. With bad books and a floundering generation fleet, Mr. Market put Atlantic's stock out to pasture after its March 1 report.

EXC Chart

EXC data by YCharts

Valuation station
Exelon stock was beaten down worse than most during the Great Recession, but a recent comeback has some investors wondering whether its stock will excel in the coming years. The company's debt and margins are in line with industry and its newly sustainable dividend makes financial sense. The company's 25.7 P/E ratio hits the top 10% of utilities, but its price-to-sales and price-to-book values remain reasonable.

Natural matters
What will ultimately determine Exelon's profitability is, you guessed it, natural gas prices. Luckily, a new report (link opens in PDF) from the Energy Information Administration points to new highs for natural gas prices over the next couple years.

Coal is expected to benefit the most, with demand jumping 7.8% for 2013. That'll provide a welcome burst of energy to coal-centric TECO Energy (NYSE: TE), but nuclear should also emerge ahead for 2013.

As nuclear plants churns out a steady 2.1 million MWH per day, Henry Hub natural gas prices are expected to jump 28% in 2013 to $2.75 per MMBtu, followed by an additional 2.2% bump in 2014.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Exelon Corporation Stock Quote
Exelon Corporation
EXC
$49.02 (0.39%) $0.19
FirstEnergy Corp. Stock Quote
FirstEnergy Corp.
FE
$43.17 (-0.21%) $0.09
Atlantic Power Corporation Stock Quote
Atlantic Power Corporation
AT

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.