Exelon Gains On Favorable Weather, Wholesale Prices A Woe

On Nov 11, 2016, we issued an updated research report on Exelon Corporation (NYSE:EXC) . In third-quarter 2016, the company benefited from new electric rates and above-average temperatures in its service territories. However, price fluctuation in the wholesale power market, where the company sells a portion of its output, was a material headwind.

Recently, Exelon announced third-quarter 2016 results. The company was able to surpass bottom-line expectations thanks to solid performance of its operating segments and favorable weather conditions in its service territories. Moreover, its total operating revenues of $8,836 million surpassed the Zacks Consensus Estimate of $8,698 million by 1.6% and improved 19.2% year over year.

Exelon invests substantially in infrastructure projects, besides expanding its renewable and fossil fuel generating capacity. The company plans to invest nearly $25.3 billion over the 2016–2020 time period, of which $24.5 billion will be allocated for Electric Transmission, Electric Distribution and Gas Delivery systems. Such systematic investments in regulated assets will drive earnings growth in the range of 7% to 9% and rate base growth of 6.1% during this timeframe.

Exelon is expected to generate free cash flow of nearly $8.2 billion over the 2016–2020 time period through business activities. The company intends to utilize this cash to lower existing debt levels, fund its capital program and pay dividends to shareholders to maximize their value.

However, Exelon’s financial performance is guided by price fluctuations in the wholesale power markets. Wholesale power prices are dependent on supply and demand, which in turn are determined by factors such as fuel prices, especially those of coal and natural gas. Unfavorable movement in power prices could impact the profitability of the company.

Moreover, Exelon operates in a capital-intensive business space, which implies that any downgrade of the credit rating will increase the cost of borrowing and thus impact the company’s margins.

Zacks Rank

Exelon currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the utility space are DTE Energy Inc. (NYSE:DTE) , WEC Energy Group (NYSE:WEC) and Ameren Corporation (NYSE:AEE) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

DTE Energy, WEC Energy and Ameren Corporation have each surpassed third-quarter 2016 earnings estimates by a respective 27.27%, 15% and 10.14%.

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