Entergy (NYSE:ETR) reported earnings last week, beating on the top line but missing on earnings. With a major tax hit and shrinking regulated sales, here's what you need to know about this dividend stock's latest quarter.
Entergy's top line tapped in at $2.74 billion, 8.7% higher than Q2 2012 and $120 million more than analysts had predicted.
Unfortunately for investors, rising revenue didn't translate to bigger earnings. The utility's adjusted EPS clocked in at $1.01, less than half of Q2 2012's $2.11 adjusted EPS and 13% below analyst estimates.
For a peck of perspective, here's how Entergy's trailing-12-month sales and adjusted EPS have fared over the last five years (essentially since the bottom of the Great Recession). Both the top and bottom lines have ended up down, although earnings' movements have been much more erratic. Revenue is in the red by 16.3%, while adjusted EPS has performed slightly better with a 14.8% dip.
Focusing on fundamentals
Unfortunately for Entergy, the taxman cameth this last quarter. Its regulated utility earnings took a $0.62 EPS dip from Q2 2012, clocking in at $1.10. And even though Entergy saw overall revenue rise, resident electric sales fell 3.6%, while commercial and government sales dropped 2.0%.
The effect of the tax hike was expected, and Entergy had already calculated an overall $1.85 EPS loss for income taxes for 2013 back in November. The prediction allowed Entergy to reaffirm its 2013 earnings guidance of $4.60-$5.40, but the squeeze still stings.
Entergy's effective tax rate last clocked in at 30%, a significant nine points higher than PPL's (NYSE:PPL) latest rate, but in line with Exelon's (NYSE:EXC) 32.5% payment. The amount of taxes a company pays ultimately depends on two things: its tax rate and its taxable income. PPL might benefit from lower tax rates in the United Kingdom, while Entergy's taxes increased this quarter without the help of a storm cost reduction from Q1. Exelon managed to pull its rates down significantly this quarter thanks to investment tax credits benefits.
Entergy is currently in overhaul mode to cut costs and improve financial performance. For employees, that means an 800-person reduction in the utility's workforce, equivalent to 5% of total staff. "Difficult decisions like job reductions are sometimes the very tough outcome of making long-term, fundamental improvements in the way a company works," said Chairman and CEO Leo Denault in a statement. "The redesign process has been comprehensive, thoughtful and focused squarely on being fair to our employees throughout the process and being responsive to the needs of our customers, our employees, our communities and our owners."
Entergy isn't the only one worried about inflated employment. Edison International (NYSE:EIX) announced in June that it would cut 1,100 jobs as a result of its decision to shut down a California nuclear plant. As companies continue to tighten finances and focus on strengths, employment numbers could shrink across the board. For Edison International, no plant means no jobs. For Entergy, its latest decision is expected to save the utility between $200 million and $250 million by 2016.
Can Entergy cut it?
Entergy shares are still hovering near recession lows, and have dropped 6% in price over the last three months.
The utility's cost-cutting ways will come in handy, but a tighter bottom line might not mean much if sales continue to taper off. With its generation earnings the only division registering year-to-date growth, the risk level is still high for a company whose stock isn't offering any major discounts to investors. I'll keep a close watch on regulated earnings but, for now at least, Entergy isn't earning a place in my portfolio.