Here is a look at how Exelon (EXC) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $0 *Rare situation. See conclusion. |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $37 |
| Value Based on 0% Growth | $22 |
| Market Implied Growth Rate | 1.02% |
| Net Current Asset Value (NCAV) | -$55.61 |
| PEmg | 10.54 |
| Current Ratio | 1.33 |
| PB Ratio | 1.05 |
Balance Sheet - 9/30/2013
| Current Assets | $9,951,000,000 |
| Current Liabilities | $7,507,000,000 |
| Total Debt | $18,570,000,000 |
| Total Assets | $79,661,000,000 |
| Intangible Assets | $2,625,000,000 |
| Total Liabilities | $57,609,000,000 |
| Outstanding Shares | 857,000,000 |
Earnings Per Share - Diluted
| 2013 (estimate) | $1.91 |
| 2012 | $1.43 |
| 2011 | $3.75 |
| 2010 | $3.87 |
| 2009 | $4.09 |
| 2008 | $4.10 |
| 2007 | $4.03 |
| 2006 | $2.35 |
| 2005 | $1.40 |
| 2004 | $2.75 |
| 2003 | $1.21 |
| 2002 | $2.57 |
Earnings Per Share - Modern Graham (Calculating EPSmg)
| 2013 (estimate) | $2.56 |
| 2012 | $3.07 |
| 2011 | $3.92 |
| 2010 | $3.89 |
| 2009 | $3.67 |
| 2008 | $3.28 |
Conclusion:
Exelon Corp presents a rare situation where the ModernGraham valuation model returns a valuation of $0. The earnings history of the company simply does not support a positive valuation, after having shrunk EPSmg (normalized earnings) from $3.28 in 2008 to an estimated $2.56 for 2013. Since the valuation model relies heavily on earnings, that lack of growth bodes very poorly for the company. It is possible the company is actually worth more than $0, but any value would have to come from the balance sheet itself and the balance sheet doesn't seem to provide much indication of value either (the Net Current Asset Value is significantly negative). As for the Defensive Investor and the Enterprising Investor, the company's current ratio and poor earnings history eliminate Exelon from contention for investment by either investor type. As a result, any investor seeking to purchase Exelon Corp should do considerable further research to determine whether the company is suitable for investment, while keeping in mind the 7 Key Tips to Value Investing.
What do you think? Is Exelon Corp overvalued? Is the company not suitable for either Defensive Investors or Enterprising Investors?
Disclosure: The author did not hold a position in Exelon Corp at the time of publication and had no intention of entering into a position within the next 72 hours.
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