What: Shares of giant utility Exelon Corporation (NYSE:EXC) jumped 14% in March after it finally got approval to buy Pepco Holdings.
So what: After two years of negotiations with regulators and other stakeholders, Exelon finally bought the east coast utility Pepco, making it the biggest utility in the country. The hope for investors is that more scale will lead to lower administrative costs for utilities, and maybe even more bargaining power with suppliers.
One of the reasons the acquisition took so long was customer and regulator concerns that the larger utility would lead to higher rates. That remains to be seen, but if that happens it would be a benefit for investors.
Now what: While investors were excited for the Exelon-Pepco merger to finally be over, it points to a larger problem utilities face nationwide. Competition from energy innovations like rooftop solar and even energy efficiency has led to flat, or even declining, demand for the country as a whole. For companies like Exelon to find growth they have to acquire growth or push through rate increases. If rates go up, it makes competing energy sources more attractive to consumers, perpetuating the downward cycle.
Exelon isn't terribly expensive at 13.5 times trailing earnings, but it does have over $26 billion in debt, which will expand after this deal, and that increases long-term risk. Given the trend of little to no growth in terms of electricity consumption, this is a stock I'll avoid for now. I just see too much disruption coming down the pipeline, and that could hurt profitability long-term.
Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.