Edison is the parent of Southern California Edison and other companies that generate or distribute electricity or that provide financing for these activities. Edison, which traces its roots back to 1886, is one of the largest investor-owned utilities in the U.S.
In the late 1990s, the State of California deregulated the electric 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 dramatically from a low point in 2002 under $8.00.
When we analyzed Edison after the March quarter, the Overall score was a fair to weak 26 points. Of the four individual gauges that fed into this composite result, Profitability was the strongest at 12 points. Value was weakest at 3 points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]
Now, with the available data from the June 2007 quarter, our gauges display the following scores:
- Cash Management: 7 of 25
- Growth: 6 of 25
- Profitability: 12 of 25
- Value: 2 of 25
- Overall: 25 of 100
Before we examine the factors that affected each gauge, let's review the latest quarterly Income Statement. We did not issue any earnings predictions for June quarter.
| ($M) | | June 2007 (actual) | June 2006 (actual) |
| Revenue (1) | | 3047 | 3001 |
| Op expenses | | | |
| | CGS (2) | (2266) | (2082) |
| | Depreciation (3) | (313) | (339) |
| | Other (4) | 33 | 10 |
| Operating Income | | 501 | 590 |
| Other income | | | |
| | Investments (5) | (26) | (24) |
| Asset sales | 0 | 1 | |
| | Interest, etc. (6) | (384) | (299) |
| Pretax income | | 91 | 268 |
| Income tax | | (0) | (95) |
| Net Income | | 91 | 173 |
| Discontinued ops | 2 | 4 | |
| | | $0.28/sh | $0.52/sh |
| | | | |
2. Fuel + Purchased Power + Other Operation and Maintenance + Property and Other Taxes.
3. Depreciation, Decommissioning, and Amortization.
4. Provision for Regulatory Adjustment Clauses + Miscellaneous.
5. Equity in Income from Partnerships, etc., + Minority Interests
6. Interest and Dividend Income + Other Nonoperating Income - Interest Expense - Other Nonoperating Deductions - Dividends on Preferred Securities
Revenue was 1.5 percent greater than in the year-earlier quarter. Cost of Goods Sold (CGS) was 74.4 percent of Revenue, compared to 69.4 percent in June 2006 and a five-year median value close to 67 percent. Depreciation expenses were 10.3 percent of Revenue, a full point less than the year-earlier value.
The net effect of the slightly higher Revenue and much greater CGS was Operating Income 15.1 percent below the amount attained one year ago.
The increase in non-operating expenses can be attributed to a $241 million charge for the early extinguishment of debt, almost $100 million more than the year-earlier figure.
It's interesting that the company didn't see the need to make any provisions for income taxes in the most recent quarter. Note 4 to the financial statements explains why in mind-numbing detail. Even with the advantage of a zero Income Tax Rate, the higher costs led to a 47 percent drop in Net Income.
Cash Management. This gauge increased from 4 points in March to 7 points now.
The measures that helped the gauge were:
- Debt/CFO = 2.6 years, compared to 4.2 years 12 months ago
- Cash Conversion Cycle Time (CCCT) = 12.6 days, down from 13.9 days, for this measure of efficiency.
- Current Ratio =1.2; weaker than we like, but near the historic norm
- LTD/Equity = 102%; highly leveraged, but decreasing
- Days of Sales Outstanding (DSO) = 30.6 days, greater than the 29.7-day level one year earlier
- Working Capital/Market Capitalization = 2.5 percent, down from 5.4 percent
Growth. This gauge decreased from 10 points in March to 6 points now.
The measures that helped the gauge were:
- CFO growth = 55 percent, up from 6.7 percent in a year
- Net Income growth = 5.2 percent, up from 3.4 percent in a year
Net income growth benefited from a change in the effective income tax rate from 32.5 to 30.6 percent
The measures that hurt the gauge were:
- Revenue growth = 2.6 percent, down from 18 percent in a year
- Revenue/Assets = 34.7 percent, down from 35.6 percent in a year
Profitability. This gauge maintained the 12 points reached in March.
These measures all contributed positively to the gauge score:
- ROIC = 12.8 percent, up from 10.5 percent in a year
- FCF/Equity = 12.3 percent, up from 2.1 percent in a year
- Operating Expenses/Revenue = 74.9 percent, down from 79.6 percent in a year
- Accrual Ratio = 0.1 percent, down from 2.6 percent in a year
The decreasing Accrual Ratio tells us that more of the company's Net Income is due to CFO, and, therefore, less is due to changes in non-operational Balance Sheet accruals.
Value. Edison's stock price rose over the course of the quarter from $49.13 to $56.12. The Value gauge, based on the latter price, dropped to 2 points, compared to 3 points three months ago.
The measures that helped the gauge were:
- Enterprise Value/Cash Flow = 7.0, down from an median value of 8.4
- P/E = 16.1, up from a median value of 12.9
- P/E to S&P 500 average P/E = 2 percent discount, compared to a more typical discount of about 20 percent
- Price/Revenue ratio = 1.4, higher than the median value of 1.1
The average P/E for the Electric Utilities industry is currently a more expensive 19.5. The average Price/Revenue for the industry is currently 1.8.
Now at a disappointing 25 out of 100 possible points, the Overall gauge has been rather static for the last couple of years. It is now exhibiting a negative reaction to a stock price that has been increasing faster than company earnings.
Posts
I have been searching for and reading various blogs hoping to find suitable ones to link to in my blog. I especially have come to like yours. I was wondering if you would like to exchange links.
ReplyDeleteDereck
http://thebeststocktradingintheworld.blogspot.com/