Utilities Sector Analysis. Bharat Deore Nate Druckenmiller Chris Henschen

Transcription

1 Utilities Sector Analysis Bharat Deore Nate Druckenmiller Chris Henschen

2 Agenda Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Questions

3 Size of the Utilities Sector Utilities 3.2% S&P Sector Size As of February 4, 2011

4 Utilities - Industries Industry Market Cap (B) P/E ROE % Div. Yield % P/B Electric 6, Water 3, Diversified 3, Gas Foreign

5 Utilities - Largest Companies Company Market Cap (B) P/E Ann. Revenue Ann. Net Income Enterprise Products Partners L.P. The Southern Company National Grid plc (ADR) , ,456 1, ,627 2,239 Exelon Corporation ,644 2,563 TransCanada Corporation (USA) Dominion Resources, Inc. Duke Energy Corporation ,036 1, ,118 2, ,731 1,063 Nextera Energy ,317 1,957 Kinder Morgan Energy Partners LP , PG&E Corporation ,399 1,194 American Electric Power Company ,400 1,451 Spectra Energy Corp , Public Service Enterprise Group ,406 1,592

6 S&P 500 vs. SIM Weight Telecommunica on Services 2.92% Materials 3.65% S&P 500 U li es 3.26% Informa on Technology 18.97% Consumer Discre onary 10.30% Consumer Staples 10.21% Energy 12.70% Industrials 11.15% Health Care 10.70% Financials 16.13% Currently underweight 94 bps

7 Performance YTD Performance 5-year Performance

8 Business Analysis

9 Five Forces Analysis Industry Rivalry Low competition; geographic first-mover advantage; new capacity for higher forecasted demand or efficiency gains Suppliers Low power; highly competitive and fragmented commodity fuel industry prevents price gouging Buyers Medium power; most end users subject to prevailing regulations 37% Household, 36% Commercial, and 27% Industrial demand New Entrants Low; high barriers to entry; capital and regulation Substitutes Low; natural monopolies with enormous economies of scale Sixth Force???

10 Catalysts & Risks Catalysts Excessively hot/cold weather patterns Improvement in the economy, especially manufacturing Increased number of households Favorable Green Energy policies Favorable rate regulations Risks Mild temperatures New economic recession / slow economic growth High/variable commodity fuel prices Unfavorable energy policy and rate regulation

11 Unemployment Rate vs. GDP 15, , , , , , , , , , , , % 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% Nominal GDP Unemployment Rate

12 S&P 500 vs. Sector vs. Industry Year End Price Performance S&P 500 Utilities Sector Electric Utilties Industry

13 Utilities Power Generation

14 Natural Gas ETF Price Utilities Sector ETF (XLU) vs. Natural Gas ETF (UNG) R² = Utility Sector ETF Price

15 Oil ETF Price Utilities Sector ETF (XLU) vs. Oil ETF (USO) R² = Utility Sector ETF Price

16 Coal ETF Price Utilities Sector ETF (XLU) vs. Coal ETF (KOL) R² = Utility Sector ETF Price

17 Regulation US Regulation: Clean Air Act The current administration aims to include CO2 in the CAA regulations American Climate and Energy Security Act (2009) Passed the house committee in 2009 Expected to include structured subsidies to help soften price increases Waxman-Warkey Act of 2009 Requires a progressive % of power to supply to be produced by renewables given the supplier generates more than 4GW/Year for public consumption

18 Effects of the Regulation Expected to shift employment away from industries hit hardest by increased costs Investments will follow into industries less affected by the regulation Could cut foreign investment if other countries don t follow suit Expected to reduce negative externalities over the long run, offsetting the higher costs to consumers Expected to reduce the growth of GDP (congressional budget office) -.2 to -3.4% depending on the stringency of the regulation Provisions in HR 2454 will directly impact the Coal Industry Direct subsidies expected to last until 2026 for the Coal Industry $4.1 billion in funding through 2019 to help those who lose employment

19 Financial Analysis Sector Revenue and Earnings Revenues Earnings

20 Financial Analysis: Margins

21 Financial Analysis: Price/Earnings Ratio

22 Valuation Analysis Relative to SP500 High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF Absolute Basis High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF Utilities sector is relatively cheap on an absolute basis as well as relative to S&P P/S is in line with 10 year median

23 Valuation Analysis

24 Valuation Analysis : Across Sector Utilities Electric Utilities Gas Utilities Multi Utilities Median Current Median Current Median Current Median Current P/Trailing E P/Forward E P/B P/S P/CF

25 Technical Analysis XLU Utilities ETF

26 Summary Analysis Conclusions View Business Economic Financial Mature industry; potential gains from favorable legislation Slow growth, with gains strongly correlated to improvements in the overall economy Recent revenue decline; stable profit margin and ROE; declining net profit margin; very strong dividend yield Neutral Slightly positive Valuation Sector trading at discount Positive Neutral / Slightly positive

27 Recommendation Stable cash flows, strong dividend yield, consistent ROE, and low Beta for portfolio diversification Therefore Increase weight by 94bps to S&P 500 benchmark Consider moving cash reserves into sector Final weighting: Even with S&P 500 at 3.26%

28 Questions?