Edison International (NYSE: EIX) recently announced earnings for the fourth quarter and full year of 2008. This post provides the GCFR analysis of the financial statements.Edison International 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 electric utilities in the U.S.
Three months ago, the GCFR Overall Gauge of Edison International increased from 8 to 21 of the 100 possible points. Our analysis report on 2008's third quarter explained the results in some detail. [A recent change to the equations we use to calculate the gauges has resulted in Edison's scores being slightly different from those originally reported.] Briefly, the increase in the Overall gauge score was driven almost entirely by the double-weighted and highly contrarian Value gauge. This gauge perked up in response to the 22 percent fall in Edison's share price during the third quarter. Penalties related to SCE's customer satisfaction and employee safety and higher tax rate outweighed growth in Operating Income and caused Net Income to decline by 6.9 percent in third quarter.
Now, with data available from the December 2008 quarter, our gauges display the following scores:
- Cash Management: 6 of 25 (down from 7 in September)
- Growth: 2 of 25 (unchanged)
- Profitability: 1 of 25 (unchanged)
- Value: 15 of 25 (up from 9)
- Overall: 31 of 100 (up from 21)
Before we examine each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations. Edison reports both GAAP earnings and non-GAAP, "core" earnings. Unless stated otherwise, our evaluation is limited to the GAAP results.
Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
http://sheet.zoho.com/public/ncarvin/eix-income-statement-2?mode=html
The results for the fourth quarter of 2007 were restated from their originally reported amounts. The differences weren't not substantial, but they were enough to change some growth percentages.
Revenue in the fourth quarter of 2008 was 2.7 percent more than in the same quarter of 2007, but it fell short of our forecast by 3.4 percent. Revenue in all of 2008 exceeded that in 2007 by 5.8 percent.
The Cost of Goods Sold (CGS) -- fuel, purchased power, etc. -- was 74.2 percent of Revenue in the quarter. This translates into a Gross Margin of 25.8 percent. Our target was 27 percent of Revenue. Fuel costs were down 6 percent, and purchased power cost 8.5 percent more than in the year-earlier quarter.
Expenses for Depreciation, Decommissioning, and Amortization were 10.5 percent of Revenue. We had estimated that these expenses would be 9 percent of Revenue in the fourth quarter.
A $30 million "Contract buyout/termination" expense was an unanticipated drag on the quarter's results.
Operating Income, as we define it, was $15 million (3.1 percent) less than that in the December 2007 quarter. We had optimistically projected the gain of 24 percent. The worse-than-expected performance was the result of higher costs and the special contract buyout charge.
We group Edison's various non-operating income and expense items into three categories. These items, in the aggregate, were consistent with our expectations. However, Equity in Income from Partnerships, was worse than anticipated.
The Income Tax Rate in the quarter was only 24.2 percent, much less than our 31 percent estimate. The reason for the discrepancy is not clear.
Minority Interests were also much less than we projected.
As a result, Net Income of $217 million ($0.66 per share) managed to squeak ahead of the last year's $211 million ($0.64 per share). Net income fell short, however, of our prediction by 18 percent. For the full year, Net Income grew by 3.2 percent relative to 2007.
| Cash Management | December 2008 | 3 months prior | 12 months prior |
| Current Ratio | 1.1 | 1.2 | 1.0 |
| LTD/Equity | 105% | 103% | 96% |
| Debt/CFO | 6.1 years | 6.2 years | 3.0 years |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 27.0 days | 34.7 days | 28.5 days |
| Working Capital/Market Capitalization | 2.7% | 3.7% | -0.1% |
| Cash Conversion Cycle Time (CCCT) | 8.8 days | 19.6 days | 7.5 days |
| Gauge Score (0 to 25) | 6 | 7 | 7 |
Liquidity and leverage are stable, but the decline in Cash Flow from Operations makes the Debt level a little harder to bear.
| Growth | December 2008 | 3 months prior | 12 months prior |
| Revenue growth | 5.8% | 5.8% | 3.4% |
| Revenue/Assets | 33.6% | 34.5% | 35.3% |
| CFO growth | -30.8% | -38.7% | -10.5% |
| Net Income growth | 3.2% | 1.0% | 2.9% |
| Gauge Score (0 to 25) | 2 | 2 | 1 |
Revenue and Net Income growing tepidly, but these gains are overshadowed by the large and continuing drop in Cash Flow from Operations.
| Profitability | December 2008 | 3 months prior | 12 months prior |
| Operating Expenses/Revenue | 82.0% | 81.7% | 80.8% |
| ROIC | 8.7% | 8.9% | 10.5% |
| FCF/Equity | -6.2% | -7.7% | 4.1% |
| Accrual Ratio | 4.4% | 4.5% | 1.5% |
| Gauge Score (0 to 25) | 1 | 1 | 2 |
Profitability has been hurt by higher operating costs. Negative Free Cash Flow is a very significant concern, which is also manifested in the lower quality of earnings suggested by the rising Accrual Ratio.
| Value | December 2008 | 3 months prior | 12 months prior | 5 year median |
| P/E | 8.7 | 10.8 | 16.0 | 12.3 |
| P/E to S&P 500 average P/E | 53% | 60% | 90% | 75% |
| Price/Revenue | 0.8 | 1.0 | 1.4 | 1.2 |
| Enterprise Value/Cash Flow (EV/CFO) | 9.0 | 10.8 | 8.0 | 8.3 |
| Gauge Score (0 to 25) | 15 | 9 | 0 | N/A |
Edison's stock price fell during the fourth quarter from $39.90 to $32.12, which was enough to inflate the Value gauge.
Edison's valuation ratios can be compared with other Electric Utilities.
| Overall | December 2008 | 3 months prior | 12 months prior |
| Gauge Score (0 to 100) | 31 | 21 | 9 |
In the fourth quarter, Revenue grew tepidly but the increase was consumed by higher Operating Expenses. Operating Income, as we define it, was lower.
Non-operating items, including a lower tax rate, made up for the decline. This enabled Net Income to show a tiny gain.
The Cash Management, Growth, and Profitability gauges were stable at weak levels. The double-weighted and highly contrarian Value gauge, however, perked up in response to the big decline in Edison's share price. This drove a nice increase in the Overall gauge score.
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