Edison, which traces its roots back to 1886, is now one of the largest investor-owned electric utilities in the U.S. In the late 1990s, the State of California deregulated the industry, which, due to loopholes and questionable practices, led to the famous power crisis in the early years of this decade. Edison managed to skirt bankruptcy during the debacle, and its stock price has recovered from a low point in 2002 under $8.00 to close to $50 today.
When we analyzed Edison after the quarter that ended in September 2006, the Overall score was a relatively poor 15 points. Of the four individual gauges that fed into this Overall result, Growth was the strongest at 11 points. Value was weakest at zero points.
We have since updated the analysis to incorporate Edison's financial results, as reported in a Form 10-K for the full year and last quarter of 2006. Our gauges now display the following scores:
- Cash Management: 16 of 25 (big jump)
- Growth: 6 of 25 (almost as big drop)
- Profitability: 6 of 25
- Value: 0 of 25 (no improvement)
- Overall: 20 of 100
Cash Management. This gauge increased an improbable 13 points from 3 to 16. The Current Ratio is now 1.27. It has been stable at about this level for the last couple of years. We would prefer to see it a little higher. Long-Term Debt/Equity is a leveraged 106 percent, but it has dropped considerably since the worst days of the power crisis. The debt ratio was 120 percent one year ago. Accounts Receivable/Revenues equals 29.3 days. This is substantially less than the historic value for the company, and it might indicate the company is finding it less difficult to get its customers to pay their bills.
Growth. This gauge dropped 5 points from September. Revenue growth is now 6 percent year over year, down from 16 percent a year ago. Net Income declined 2 percent from a year ago. Net income would have rose had not the income tax rate increased from 29 to 35 percent. CFO growth is an eye-popping 62 percent, yet down from a fabulous 98 percent a year ago. Revenue/Assets is 35 percent; it has been holding steady.
Profitability. This gauge dropped 1 point from the prior quarter. ROIC slipped to a moderate 10 percent from 13 percent a year ago. FCF/Equity jumped up to 12 percent from 5 percent. Operating Expenses/Revenue moved up in the last year from 77 percent to 80 percent. The change was primarily due to a decline in Gross Margin of 3 percent. The Accrual Ratio, which we like to be both negative and declining, edged down to zero from +2 percent. This tells us that more of the company's Net Income is due to CFO, and, therefore, less is due to changes in balance sheet accruals.
Value. This gauge, based on the stock price of $45.48 at the year's end was zero points, compared to 0 and 3 points three and twelve months ago, respectively. The P/E at the end of the quarter was 13.7, up a little from recent quarters. The increase suggests the shares have become a bit more expensive. Reuters reports that the average P/E for the industry is 18.5, but Yahoo indicates a more credible value of 14.3. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is at a 16 percent discount to the average P/E, using core operating earnings for stocks in the S&P 500. One year ago, the company's P/E had a 20 percent discount to the market, as expressed by this measure. It's typical for slow-growth utility companies to trade at a discount. The PEG ratio is N/A because of the Net Income decline. Price/Revenue, which isn't affected by the one-time factors that cause wide swings in earnings, increased to 117 percent. However, it's down from 122 percent one year ago.
Now at a disappointing 20 out of 100 possible points, the Overall gauge has been below 30 points since the California power crisis passed. Yet, the stock price has moved up steadily, which sinks the Value score.
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