In 2012 thus far, shares of the electric, gas, and steam power provider have been a middling investment, losing 2.6%. More recently, the stock has seen analysts’ opinions diverge with regard to its attractiveness, as Credit Suisse issued an “underperform” downgrade earlier this week, while Argus upgraded Con Ed to a “buy” rating. Initial reports show that Credit Suisse’s main concern with the stock is its valuation.
At its current share price in the $60 range, Con Ed trades at a multiple of 16.7 times earnings, which is a shave above the utilities industry average (16.6X), and more expensive than its own five-year historical average P/E of 14.4X. The company’s +15% premium above its intermediate historical average compares unfavorably to peers like Pepco Holdings, Inc. (NYSE:POM) at -50.9%, Duke Energy Corp (NYSE:DUK) at +11.4%, and The Southern Company (NYSE:SO) at +10.7%. In fact, of its closest competitors, only Northeast Utilities System (NYSE:NU) at +49.0%, is more expensive than its five-year historical average.
Another factor working against Con Ed is its slowing earnings growth, which averaged 3.8% annually over the past half-decade, but is expected to barely squeak above 3 percentage points a year over the next five years. By comparison, competitors like Pepco (4.6%), Duke (3.5%), Southern (5.4%), and Northeast (5.7%) are all expecting more rapid bottom line growth over the intermediate term. Factoring this estimated growth into the equation, we can see that Con Ed also sports a stratospheric PEG ratio of 5.20; typically any figure above 2.0 signals overvaluation. Even more importantly, Con Ed’s PEG is above the likes of Pepco (4.09), Southern (3.45), and Northeast (3.71) quite handily.
Despite these concerns, there are a few factors in play that can push shares of Con Ed out of their current glut. First off, the company has beat the Street’s earnings estimates in four of the past five quarters, most recently in Q2, where it reported a positive surprise of 3.1%. In the two days following the announcement, Con Ed flirted with $65 a share. By the end 2012’s third quarter, analysts expect the company to generate EPS of $1.36, up 3 cents year-over-year.
Q3 results are expected to be announced in early November, and investors will also get a peak at forward-looking guidance. As is the case with any power company operating in the northeastern U.S., winter weather will play a significant role in Con Ed’s revenues, most notably in its steam division. Last year, a milder than normal winter was partially responsible for disappointing revenues from this segment, though 2012-2013 estimates are looking more promising. Ninety-day forecasts predict that the northeast will have snowfall slightly below average levels, but that temperatures will be frigid, between 2 and 3 degrees below long-range norms. Throw in the fact that the company will begin to offer natural gas to businesses in the greater New York City area, and it’s very possible that we could see further earnings beats over the next two quarters.
The potential for positive earnings surprise may be why several insiders have bought more shares of Con Ed over the past few weeks, including: CFO Robert Hoglund, SVP Frances Resheske, SVP Luther Tai, SVP Joseph Oates, VP Gurudatta Nadkarni, President Craig Ivey, Director Gordon Davis, General Council Elizabeth Moore, CAO Robert Muccilo, and Director Michael Giudice Del. Of these transactions, Tai and Hoglund were the most bullish, buying a little of $14,000 worth of the stock between them.
While the trades of these ten insiders weren’t particularly gigantic in nature, they indicate improved sentiment within Con Ed nonetheless. As the old saying goes: there are many reasons for a company’s executives to sell, but only one, very bullish reason for them to buy. In comparison to the likes Pepco (0), Duke (0), Southern (1), and Northeast (0), the number of optimistic insiders at Con Ed blows the competition out of the water over the past few months.
Though investors should remain cautious about the stock’s current valuation, it’s important to consider the role that EPS beats may play on Con Ed’s stock price. As empirical studies have shown, investors who mimic or “monkey” a company’s most prominent insiders can beat the market by an average of 7 percentage points a year. We can’t think of a more important group of Con Ed insiders than the ten mentioned above. But don’t take our word for it, check out their Form 4 filings in Insider Monkey’s comprehensive database.
