The thought of more nuclear power may conjure up images of the Three Mile Island accident or Blinky, the three-eyed fish from the animated television show The Simpsons. But a growing number of policymakers and even environmentalists are coming to appreciate the advantages of atomic energy. And that has many investors taking a closer look at Exelon.
The Kennett Square, Penn., company is the largest operator of nuclear power plants in the U.S. and third largest in the world. Exelon (symbol EXC) runs ten nuclear power stations with 17 reactors, including one on Three Mile Island but not the reactor involved in the 1979 accident. Last year, the company's nuclear fleet produced a record 132.3 million net megawatt-hours of electricity and achieved an average capacity of 94.5%, helping reinforce Exelon's reputation as one of the most efficient utility companies.
Operators of nuclear power plants have a built-in cost advantage at the moment. High prices for coal and natural gas, which fuel non-nuclear power plants, means atomic reactors can run at a lower cost than competitors. "Rising coal prices may persist," putting a strain on the coal-fired plants in the Midwest, says Deutsche Bank analyst John Kiani. "No other generation company is as leveraged to these emerging trends as Exelon."
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
And the company need not worry about new entrants rushing into a hot market because nuclear power plants take years to build, cost billions and face vocal opposition from communities near proposed reactor sites.
Efforts to fight climate change have shifted the political winds for Exelon. The nuclear power industry had been at a standstill since the 1980s because of public perceptions about safety. But because atomic power plants generate lower greenhouse gas emissions than other kinds of power generators, the industry has gained more political support as the U.S. looks to energy sources beyond carbon-spewing fossil fuels.
At the national level, the outlook is promising. Congress is considering legislation that would create a system of carbon-emission credits and licenses similar to one in Europe. Citigroup analyst Greg Gordon says legislation to create a "cap and trade" system will pass next year and go into effect in 2012. The three remaining presidential candidates support such regulation.
"Exelon's nuclear fleet benefits from any U.S. carbon-emissions policy," says Credit Suisse analyst Dan Eggers. He estimates that creation of such a program could add $10.50 per share to the value of the company's stock.
Exelon is more than nuclear power. It runs traditional power plants and also has distribution and transmission businesses through its two other business units: Commonwealth Edison, which operates in Northern Illinois, and PECO Energy, which operates in southeastern Pennsylvania.
These units carry some political risk. For example, interference from the Pennsylvania legislature following the expiration of the state's electricity rate caps in 2010 could affect future PECO revenue. ComEd and Illinois regulators are negotiating rate increases that are expected to be settled in September. Unfavorable outcomes in either case could hobble Exelon's revenue and profits.
Yet power generation, which involves the sale of electricity to other utilities, is Exelon's cash cow, not ComEd and PECO. They contribute more total revenue to Exelon than its power generation business. But power generation brings in more than half the operating profits.
Exelon stock is not particularly cheap. It trades for 20 times the $4.34 per share that analysts, on average, think the company will earn this year and yields a puny (for a utility) 2.3%. The average utility stock trades for 16 times 2008 earnings. Exelon shares, which closed at $88 on May 30, have gained 22% in past four months. Credit Suisse's Egger says the stock "isn't offensively valued" and the company's growth prospects are worth the price. He rates shares a "buy" with a 12-month target price of $95.
-
The Y Rule of Retirement: Why Men Need to Plan DifferentlyIf you have a Y chromosome (because you're a guy), following the 'Y rule of retirement' can help you transition to this new life stage with grace.
-
Retire on This Island for Mediterranean Living on the CheapThis independent nation has a lower cost of living and more visa options than many of its Mediterranean cousins.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
My Three-Day Rule for Investing: And If it Applies NowStock Market I've seen a lot in my career. Here's what I see now in the stock market.
-
Is It Time to Invest in Europe?Stock Market Europe is being shaken out of its lethargy, militarily and otherwise, by Donald Trump's changes in U.S. policy. Should investors start buying?
