Analysts: Alexa Bowen, Blake Porter and Kennedy White Washburn University Applied Portfolio Management EXC Sector: Utilities HOLD Report Date: 4/18/2016 Market Cap (mm) $31,337 Annual Dividend $1.24 2 Yr Beta (S&P 500 Index) 0.45 Return on Capital 4.9% Dividend Yield 3. Annualized Alpha 6.2% Compared With: EPS (ttm) $2.55 Price/Earnings (ttm) 13.8 Institutional Ownership 7. Duke Energy Corporation Current Price $35.21 Economic Value Added (ttm) $723 Short Interest (% of Shares) 2.4% American Electric Power Co., Inc. 12 mo. Target Price $35.00 Free Cash Flow Margin 18.1% Days to Cover Short 2.8 and the S&P 500 Index Business Description, a utility services holding company, engages in the energy generation and delivery businesses in the United States. It owns electric generating facilities, such as nuclear, fossil, and hydroelectric generation facilities, as well as wind and solar facilities. The company also sells renewable energy and other energy related products and services; and engages in natural gas and oil exploration and production activities, as well as sells electricity and natural gas to wholesale and retail customers. In addition, it is involved in the purchase and regulated retail sale of electricity, and the provision of electricity transmission and distribution services to retail customers in northern Illinois, southeastern Pennsylvania, and central Maryland. Further, the company 2 1 1 1 1 2 2 EXC DUK AEP Investment Thesis After thorough analysis of EXC we have reached a HOLD decision. The stock has been and continues to be extremely undervalued. The stock is currently undervalued by 5. After cutting the dividend in 2014, they have renewed their commitment and will grow the dividend at 2. for the next three years. Revenue is projected to increase moderatley into the future. The new acquisition of Pepco Holdings for $12 billion reduced EXC's exposure to market volatility, because Pepco is a countercyclical retail supply and regulated distribution business. Contrary to the most recent years, we project EXC will have positive free cash flows in the near to longterm. 1 1 1 2 EXC ^SPX ANNUALIZED 3 YEAR CAGR Total Revenue 7.8% Free Cash Flow 200.7% EBIT 15. Total Invested Capital 10.9% NOPAT 16. Total Assets 6.7% Earnings Per Share 21. Economic Value Added 46.6% Dividends Per Share 16.1% Market Value Added 172.4% 2 18% 16% 14% 12% 1 8% 6% 4% 2% ROA ROE ROIC Margins and Yields Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield Per Share Metrics Earnings Dividends NOPAT Free Cash Flow 23. 12.3% 14.8% 11.2% 15. N/A 45.8% 0.7% 11.9% 18.1% 8.7% 4.8% 7.3% 5.1% 9.2% 4.8% 7.1% 5.3% 3.3% 4. 3.76 1.42 2.01 1.89 2.55 2.10 2.10 1.46 1.24 1.24 4.28 2.31 2.69 2.60 3.35 N/A (13.17) (0.20) (3.78) (5.98) $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 EBIT Net Operating Profit After Tax $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 Economic Value Added Market Valued Added $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $2,000 25 20 15 10 5 0 Price/Earnings Price/Free Cash Flow Datasource: Capital IQ
EXC Sector Utilities Duke Energy Corporation DUK Sector Utilities Income Statement Highlights Income Statement Highlights Total Revenue 19,063 23,489 24,888 27,429 29,447 Total Revenue 14,236 17,446 22,154 23,427 23,063 Cost of Goods Sold 12,444 17,689 17,951 20,901 21,389 Cost of Goods Sold 8,518 10,167 12,574 13,470 12,872 Gross Profit 6,619 5,800 6,937 6,528 8,058 Gross Profit 5,718 7,279 9,580 9,957 10,191 SG&A Expense 0 0 0 0 0 SG&A Expense 104 232 321 355 318 R&D Expense 0 0 0 0 0 R&D Expense 0 0 0 0 0 Dep. & Amort. 1,347 1,881 2,153 2,314 2,450 Dep. & Amort. 1,806 2,145 2,668 3,066 3,144 Other Oper. Exp. 785 1,019 1,095 1,154 1,200 Other Oper. Exp. 715 999 1,369 1,230 1,148 Operating Income 4,487 2,900 3,689 3,060 4,408 Operating Income 3,093 3,903 5,222 5,306 5,581 Interest Expense (726) (928) (1,356) (1,065) (1,033) Interest Expense (859) (1,244) (1,543) (1,622) (1,613) Other Non Oper. Exp. 117 155 268 184 117 Other Non Oper. Exp. 463 495 358 424 344 EBT ex Unusuals 3,941 2,162 2,633 2,220 3,493 EBT ex Unusuals 2,750 3,204 4,063 4,165 4,350 Total Unusual Exp. 15 (364) 140 266 (170) Total Unusual Exp. (285) (970) (268) (31) (213) Earnings Before Tax 3,956 1,798 2,773 2,486 3,323 Earnings Before Tax 2,465 2,234 3,795 4,134 4,137 Income Tax Expense 1,457 627 1,044 666 1,073 Income Tax Expense 752 623 1,205 1,669 1,326 Net Income 2,495 1,160 1,719 1,623 2,269 Net Income 1,706 1,768 2,665 1,883 2,816 Earnings per Share $3.76 $1.42 $2.01 $1.89 $2.55 Earnings per Share $3.84 $3.08 $3.77 $2.66 $4.06 Dividends per Share $2.10 $2.10 $1.46 $1.24 $1.24 Dividends per Share $2.97 $3.03 $3.09 $3.15 $3.24 Effective Tax Rate 36.83% 34.87% 37.6 26.79% 32.29% Effective Tax Rate 30.51% 27.89% 31.7 40.37% 32.0 Total Common Shares 663 816 856 860 890 Total Common Shares 444 574 706 707 694 Year end Stock Price $43.37 996 $29.74 997 $27.39 998 $37.08 999 $27.77 1000 Year end Stock Price $66.00 996 $63.80 997 $69.01 998 $83.54 999 $71.39 1000 Balance Sheet Highlights Balance Sheet Highlights Assets Assets Cash and Equivalents 1,016 1,486 1,609 1,878 6,502 Cash and Equivalents 2,110 1,424 1,501 2,036 857 Short Term Investments 0 0 0 0 0 Short Term Investments 190 333 44 0 0 Total Cash & ST Invest. 1,016 1,486 1,609 1,878 6,502 Total Cash & ST Invest. 2,304 1,759 1,545 2,038 863 Total Receivables 2,613 4,228 4,156 4,709 4,099 Total Receivables 1,941 2,717 3,005 2,764 2,451 Inventory 864 1,014 1,105 1,603 1,566 Inventory 1,638 3,223 3,250 3,459 3,810 Prepaid Expenses 0 0 0 0 0 Prepaid Expenses 0 0 0 0 0 Total Current Assets 5,713 10,140 10,137 11,853 15,334 Total Current Assets 6,880 10,122 10,516 11,575 8,322 Net PPE 30,129 42,449 44,505 48,896 53,916 Net PPE 41,946 67,152 68,150 68,589 74,136 Total Assets 54,995 78,561 79,924 86,416 95,384 Total Assets 62,526 113,856 114,779 120,557 121,156 Liabilities and Equity Liabilities and Equity Accounts Payable 1,444 2,683 2,590 3,048 2,883 Accounts Payable 1,433 2,444 2,391 2,271 2,400 Accrued Expenses 1,026 1,703 1,523 1,283 2,139 Accrued Expenses 659 1,173 1,130 1,118 1,115 Short Term Debt 388 210 341 460 533 Short Term Debt 427 1,057 839 2,514 3,633 Total Current Liab. 5,134 7,791 7,728 8,762 9,118 Total Current Liab. 5,528 10,029 8,644 11,233 11,400 Long Term Debt 12,276 18,433 18,271 19,853 24,261 Long Term Debt 18,830 36,394 38,160 37,097 37,543 Total Liabilities 40,607 56,831 56,984 62,283 68,062 Total Liabilities 39,661 72,822 73,371 79,658 81,385 Preferred Equity 0 0 0 0 0 Preferred Equity 0 0 0 0 0 Common Stock & APIC 9,107 16,632 16,741 16,709 18,676 Common Stock & APIC 21,133 39,280 39,366 39,406 37,969 Retained Earnings 10,055 9,893 10,358 10,910 12,068 Retained Earnings 1,873 1,889 2,363 2,012 2,564 Treasury Stock (2,327) (2,327) (2,327) (2,327) (2,327) Treasury Stock 0 0 0 0 0 Total Common Equity 14,385 21,431 22,732 22,608 25,793 Total Common Equity 22,772 40,863 41,330 40,875 39,727 Total Equity 14,388 21,730 22,940 24,133 27,322 Total Equity 22,865 41,034 41,408 40,899 39,771 Total Liab. and Equity 54,995 78,561 79,924 86,416 95,384 Total Liab. and Equity 62,526 113,856 114,779 120,557 121,156 1. Margins and Profitability EXC, Page 2 of 17 Copyright Robert A. Weigand, Ph.D., 2016
EXC DUK Duke Energy Corporation Profit Margins Profit Margins Gross Profit Margin 34.7% 24.7% 27.9% 23.8% 27.4% Gross Profit Margin 40.2% 41.7% 43.2% 42. 44.2% Operating Profit Margin 23. 12.3% 14.8% 11.2% 15. Operating Profit Margin 21.7% 22.4% 23.6% 22.6% 24.2% Net Profit Margin 13.1% 4.9% 6.9% 5.9% 7.7% Net Profit Margin 12. 10.1% 12. 8. 12.2% Free Cash Flow Margin N/A 45.8% 0.7% 11.9% 18.1% Free Cash Flow Margin N/A 130. 10.7% 9.1% 2.1% 4 3 3 2 2 1 1 Gross Profit Margin Operating Profit Margin 5 4 3 2 1 Gross Profit Margin EXC DUK 5 4 3 2 1 Gross Profit Margin Operating Profit Margin Operating Profit Margin EXC DUK 30. 25. 20. 15. 10. 5. 0. Net Profit Margin EXC DUK 14. 12. 10. 8. 6. 4. 2. 0. Free Cash Flow Margin EXC DUK 20. 0. 20. 40. 60. 80. 100. 120. 140. Analyst Comments: The above profit margins are measures of value creating and profitability as a percentage of total revenue. In comparison to Duke Energy Corporation (DUK), Exelon (EXC) is less profitable. EXC sees a pretty drastic drop across these metrics in 2011 2012, possibly caused by the acquisition of Constellation Energy. This drop shows that the $4 billion increase in revenues between these 2 years was eaten up in COGS. Thee margins appear to be slowly creeping back up to the previous levels. While DUK's gross and operating margins have been pretty stable the past 5 years, EXC's have been more volatile making them more risky, however with more risk comes greater possible return. The free cash flow margins of the company are also extremely volatile, but with the many mergers and aquisitions that happen often within this industry, this is grounded. 1. Margins and Profitability EXC, Page 3 of 17 Copyright Robert A. Weigand, Ph.D., 2016
EXC DUK Duke Energy Corporation Profitability Ratios Profitability Ratios Net Profit Margin 13.1% 4.9% 6.9% 5.9% 7.7% Net Profit Margin 12. 10.1% 12. 8. 12.2% Total Asset Turnover 0.3 0.3 0.3 0.3 0.3 Total Asset Turnover 0.2 0.2 0.2 0.2 0.2 = Return on Assets 4. 1. 2.2% 1.9% 2.4% = Return on Assets 2.7% 1.6% 2.3% 1.6% 2.3% Equity Multiplier 3.8 3.6 3.5 3.6 3.5 Equity Multiplier 2.7 2.8 2.8 2.9 3.0 = Return on Equity 17.3% 5.3% 7. 6.7% 8.3% = Return on Equity 7. 4.3% 6.4% 4.6% 7.1% 2 1 1 Return on Assets Return on Equity 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 Total Asset Turnover EXC DUK 8% 7% 6% 4% 3% 2% 1% Return on Assets Return on Equity 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Equity Multiplier EXC DUK Return on Assets EXC DUK 5. 4. 3. 2. 1. 0. Return on Equity EXC DUK 20. 15. 10. 5. 0. Analyst Comments: The above profitability ratios measure the ability of a EXC and DUK to generate efficient profits. The companies are pretty comparably competitive between these ratios, however EXC is most often in the lead and reveals they are more economical when it comes to their profits. EXC has a slightly higher Total Asset Turnover across the past 5 years, revealing they generate more revenue per dollar of assets. EXC is also superior when considering the equity multiplier, revealing their higher leverage and larger financing done through debt. 1. Margins and Profitability EXC, Page 4 of 17 Copyright Robert A. Weigand, Ph.D., 2016
EXC DUK Duke Energy Corporation Multiples and Yields Multiples and Yields Price/Earnings 11.5 20.9 13.6 19.6 10.9 Price/Earnings 17.2 20.7 18.3 31.4 17.6 Price/Book 0.5 0.3 0.3 0.4 0.3 Price/Book 0.5 0.3 0.4 0.5 0.4 Price/Free Cash Flow N/A N/A N/A N/A N/A Price/Free Cash Flow N/A N/A 20.6 27.7 N/A Earnings Yield 8.7% 4.8% 7.3% 5.1% 9.2% Earnings Yield 5.8% 4.8% 5. 3.2% 5.7% Dividend Yield 4.8% 7.1% 5.3% 3.3% 4. Dividend Yield 4. 4.7% 4. 3.8% 4. 25.0 2 15.0 1 5.0 Price/Earnings Price/Free Cash Flow 35.0 3 25.0 2 15.0 1 5.0 Price to Earnings EXC DUK 35.0 3 25.0 2 15.0 1 5.0 Price/Earnings Price/Free Cash Flow 10. Earnings Yield Dividend Yield 10. Earnings Yield EXC DUK 6. Earnings Yield Dividend Yield 8. 6. 4. 2. 8. 6. 4. 2. 5. 4. 3. 2. 1. 0. 0. 0. 0.6 0.5 0.4 0.3 0.2 0.1 Price to Book EXC DUK 8. 7. 6. 5. 4. 3. 2. 1. 0. Dividend Yield EXC DUK 3 25.0 2 15.0 1 5.0 Price to Free Cash Flow EXC DUK Analyst Comments: Price to Earnings EXC has fallen behind DUK in P/E sector due to DUK's high stock price in relation to their earnings. Earnings Yield and Dividend Yield A sharp decrease in dividend yield can be observed in 2014, as EXC had to lower their dividend in order to make up for losses. The yield can be expected to increase into the future, and does so in 2015. The significant increase in earnings can is responislbe for the large increase of Earnings Yield in 2015. Dividend Yield In 2012 EXC had a lead over DUK in terms of dividend yield, however DUK has begun to raise their dividend and in the most recent year of 2015 the companies had nearly the same yield. 2. Relative Valuation and Debt EXC, Page 5 of 17 Copyright Robert A. Weigand, Ph.D., 2016
EXC DUK Duke Energy Corporation Liquidity and Debt Liquidity and Debt Current Ratio 1.11 1.30 1.31 1.35 1.68 Current Ratio 1.24 1.01 1.22 1.03 0.73 Quick Ratio 0.94 1.17 1.17 1.17 1.51 Quick Ratio 0.95 0.69 0.84 0.72 0.40 Days Sales Outstanding 53 65.70 60.95 62.66 50.81 Days Sales Outstanding 49.77 56.84 49.51 43.06 38.79 Inventory Turnover 22.06 23.16 22.52 17.11 18.80 Inventory Turnover 8.69 5.41 6.82 6.77 6.05 Total Debt to Assets 23. 23.7% 23.3% 23. 26. Total Debt to Assets 30.8% 32.9% 34. 32.9% 34. Long Term Debt to Equity 85.3% 86. 80.4% 87.8% 94.1% Long Term Debt to Equity 82.7% 89.1% 92.3% 90.8% 94. Times Interest Earned 6.18 3.13 2.72 2.87 4.27 Times Interest Earned 3.60 3.14 3.38 3.27 3.46 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Current Ratio Quick Ratio 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Current Ratio EXC DUK 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Current Ratio Quick Ratio 7 6 5 4 3 2 1 Days Sales Outstanding Inventory Turnover 4 3 3 2 2 1 1 Total Debt to Assets EXC DUK 6 5 4 3 2 1 Days Sales Outstanding Inventory Turnover 10 Total Debt to Assets Long-Term Debt to Equity 10 Long-Term Debt to Equity EXC DUK 100. Total Debt to Assets Long-Term Debt to Equity 8 6 4 2 9 9 8 8 7 80. 60. 40. 20. 7 0. Analyst Comments: Current Ratio EXC has historically and currently carries lessshort term debt in comparison to short term assets than DUK. DUK most likely retrieves less of their capital from issuing of shares or long term debt. Total Debt to Assets DUK has historically and currently carriers more total debt in relation to assets, than EXC. Long Term Debt to Equity Since 2012 DUK has carried a larger amount of long term debt to equity than EXC. Overall it is clear the DUK is much heavier leveraged than EXC. It is most likely DUK is undergoing heavy investment in new power plants. 2. Relative Valuation and Debt EXC, Page 6 of 17 Copyright Robert A. Weigand, Ph.D., 2016
EXC DUK Duke Energy Corporation Total Invested Capital Total Invested Capital Total Cash and ST Investments 1,016 1,486 1,609 1,878 6,502 Total Cash and ST Investments 2,304 1,759 1,545 2,038 863 + Receivables 2,613 4,228 4,156 4,709 4,099 + Receivables 1,941 2,717 3,005 2,764 2,451 + Inventory 864 1,014 1,105 1,603 1,566 + Inventory 1,638 3,223 3,250 3,459 3,810 Accounts Payable 1,444 2,683 2,590 3,048 2,883 Accounts Payable 1,433 2,444 2,391 2,271 2,400 Accrued Expenses 1,026 1,703 1,523 1,283 2,139 Accrued Expenses 659 1,173 1,130 1,118 1,115 = Net Oper. Working Capital 2,023 2,342 2,757 3,859 7,145 = Net Oper. Working Capital 3,791 4,082 4,279 4,872 3,609 + Net Property, Plant & Equip. 30,129 42,449 44,505 48,896 53,916 + Net Property, Plant & Equip. 41,946 67,152 68,150 68,589 74,136 = Total Invested Capital 32,152 44,791 47,262 52,755 61,061 = Total Invested Capital 45,737 71,234 72,429 73,461 77,745 Total Weighted Shares 663 816 856 860 890 Total Weighted Shares 444 574 706 707 694 = Total Invested Capital/Share $48.49 $54.89 $55.21 $61.34 $68.61 = Total Invested Capital/Share $103.01 $124.10 $102.59 $103.91 $112.02 Net Property, Plant & Equip. Total Invested Capital Total Invested Capital per Share EXC DUK Net Property, Plant & Equip. Total Invested Capital $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $140 $120 $100 $80 $60 $40 $20.00 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 EXC DUK Duke Energy Corporation NOPAT and Free Cash Flow NOPAT and Free Cash Flow Operating Income (EBIT) 4,487 2,900 3,689 3,060 4,408 Operating Income (EBIT) 3,093 3,903 5,222 5,306 5,581 (1 Effective Tax Rate) 36.8% 34.9% 37.6% 26.8% 32.3% (1 Effective Tax Rate) 30. 27.9% 31.8% 40.4% 32.1% = Net Oper. Profit After Tax 2,834 1,889 2,300 2,240 2,985 = Net Oper. Profit After Tax 2,149 2,815 3,564 3,164 3,792 Total Invested Capital N/A 12,639 2,471 5,493 8,306 Total Invested Capital N/A 25,497 1,195 1,032 4,284 = Free Cash Flow N/A (10,750) (171) (3,253) (5,321) = Free Cash Flow N/A (22,682) 2,369 2,132 (492) NOPAT per Share $4.28 $2.31 $2.69 $2.60 $3.35 NOPAT per Share $4.84 $4.90 $5.05 $4.48 $5.46 Free Cash Flow per Share N/A ($13.17) (.20) ($3.78) ($5.98) Free Cash Flow per Share N/A ($39.52) $3.36 $3.02 (.71) Net Operating Profit After Tax Free Cash Flow NOPAT per Share EXC DUK Net Operating Profit After Tax Free Cash Flow $4,000 $2,000 ($2,000) ($4,000) ($6,000) ($8,000) ($10,000) ($12,000) $6.00 $5.00 $4.00 $3.00 $2.00 $1.00.00 $10,000 $5,000 ($5,000) ($10,000) ($15,000) ($20,000) ($25,000) Analyst Comments: Having a stable and growing net operating profit after tax (NOPAT), which measures the operating profit a firm generates before accouting for interest payments, is a positive sign, we would prefer to see the resulting free cash flow (FCF) positive and much less volatile. A noticable downtrend has developed since 2013, which was the closest that Exelon came to having a positive FCF. The cause for the exceptionally abysmal FCF in 2015 is a combination of a larger cash position and a significant increase in the EXC's net property, plant, and equipment (Net PPE). When comparing the NOPAT per share of EXC and DUK, we see that DUK nearly doubles that of EXC, but the margin is decreasing. This is due to DUK's ability to earn a higher NOPAT, while also having fewer shares than EXC. 3. Value Creation and DCF Model EXC, Page 7 of 17 Copyright Robert A. Weigand, Ph.D., 2016
EXC DUK Duke Energy Corporation Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted % Equity Capitalization $24,715 49.9% 4.024% 2.009% Equity Capitalization $49,545 54.6% 2.028% 1.108% + Total Debt $24,794 50.1% 5.00 1.69 + Total Debt $41,176 45.4% 5.00 1.542% + Preferred Stock 0. 0 0 + Preferred Stock 0. 0 0 = Value of All Securities $49,509 100. = Value of All Securities $90,721 100. Effective Tax Rate 32.29% Alternative RF Rate: Effective Tax Rate 32.0 Alternative RF Rate: Risk Free Rate 1.924% 1.924% Risk Free Rate 1.924% 1.924% Beta (5 Yr) 0.300 Alternative Beta: 0.12279 Beta (5 Yr) 15 Alternative Beta: 1491 Market Risk Premium 7. 0.300 Market Risk Premium 7. CAPM Cost of Equity 4.024% CAPM Cost of Equity 2.028% Weighted Average Cost of Capital: 3.704% Weighted Average Cost of Capital: 2.65 3.704% 3.704% 3.704% 3.704% 3.704% EXC DUK Duke Energy Corporation ROIC, EVA and MVA ROIC, EVA and MVA Return on Invested Capital 8.8% 4.2% 4.9% 4.2% 4.9% Return on Invested Capital 4.7% 4. 4.9% 4.3% 4.9% Economic Value Added 1,643 230 549 286 723 Economic Value Added 938 927 1,645 1,217 1,732 Market Valued Added 14,369 2,837 714 9,281 1,078 Market Valued Added 6,532 4,242 7,391 18,188 9,818 EVA per Share $2.48.28.64.33.81 EVA per Share $2.11 $1.62 $2.33 $1.72 $2.50 MVA per Share $21.67 $3.48.83 $10.79 ($1.21) MVA per Share $14.71 ($7.39) $10.47 $25.73 $14.15 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Economic Value-Added Market Valued-Added 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2,000 $3.00 $2.50 $2.00 $1.50 $1.00.50.00 EVA per Share EXC DUK 2,000 1,500 1,000 500 0 Economic Value-Added Market Valued-Added 20,000 15,000 10,000 5,000 0 5,000 10,000 2 1 1 Return on Invested Capital Return on Equity Return on Invested Capital EXC DUK 10. 8. 6. 4. 2. 0. 8% 7% 6% 4% 3% 2% 1% Return on Invested Capital Return on Equity Analyst Comments: When looking at the comparison of the ecnominc value added (EVA), which is a year by year meausure of how much economic profit the firm has created, and the marekt value added (MVA), which is often referred to as the ultimate bottom line for a publicly traded company, we see the two metrics have moved inversely since 2013. In 2014, when EVA was quite low, MVA was at a four year high. Similarly, in 2015 when there was a four year high in EVA, there was a five year low in EVA. If we compare the ROIC of EXC and DUK, we see that since 2011 the two companies have moved in concert with one another, increasing and decreasing in corresponding years. 3. Value Creation and DCF Model EXC, Page 8 of 17 Copyright Robert A. Weigand, Ph.D., 2016
Long Term Growth Rate: Long Term Growth Rate: EXC 1. DUK Duke Energy Corporation Intrinsic Value Model Intrinsic Value Model PV of Future FCFs 189,878 186,161 192,886 196,778 198,746 PV of Future FCFs 35,039 13,285 16,006 18,562 18,562 + Value of Non Oper. Assets 1,016 1,486 1,609 1,878 6,502 + Value of Non Oper. Assets 2,300 1,757 1,545 2,036 857 = Total Intrinsic Firm Value 188,862 184,675 191,277 194,900 192,244 = Total Intrinsic Firm Value 32,739 11,528 14,461 16,526 17,705 Total Debt 12,664 18,643 18,612 20,313 24,794 Total Debt 19,257 37,451 38,999 39,611 41,176 = Intrinsic Value of Equity 201,526 203,318 209,889 215,213 217,038 = Intrinsic Value of Equity 51,996 48,979 53,460 56,137 58,881 Total Weighted Shares 663 816 856 860 890 Total Weighted Shares 444 574 706 707 694 = Per Share Intrinsic Value $303.96 $249.16 $245.20 $250.25 $243.86 = Per Share Intrinsic Value $117.11 $85.33 $75.72 $79.40 $84.84 vs. Year End Stock Price $43.37 $29.74 $27.39 $37.08 $27.77 vs. Year End Stock Price $66.00 $63.80 $69.01 $83.54 $71.39 Over (Under) Valuation/Share $347.33 $278.90 $272.59 $287.33 $271.63 Over (Under) Valuation/Share $183.11 $149.13 $144.73 $162.94 $156.23 % Over (Under) Valued 114.3% 111.9% 111.2% 114.8% 111.4% % Over (Under) Valued 156.4% 174.8% 191.1% 205.2% 184.1% $100 $50 $50 $100 $150 $200 $250 $300 $350 Year-End Stock Price Per Share Intrinsic Value $30 $25 $20 $15 $10 $5 $5 $10 MVA per Share EXC DUK $100 $50 $50 $100 $150 Year-End Stock Price Per Share Intrinsic Value $400 $350 $300 $250 $200 $150 $100 $50 $ Over (Under) Valued % Over (Under) Valued 109% 11 111% 112% 113% 114% 11 116% 1 8% 6% 4% 2% Return on Invested Capital WACC $200 $150 $100 $50 $ Over (Under) Valued % Over (Under) Valued 5 10 15 20 25 Analyst Comments: Based on our model, we see that Exelon's year end stock price is disastrously higher than the per share intrinsic value. Based on our competitor, DUK, we see their per share intrinsic value is also severly negative. With the large discrepency between the two values, it results in an overvaluation of $246.08 for Exelon in the most recent year. The overvaluation of DUK is similar at $156.23, but not quite as exagerated. In looking at the comparison between the ROIC and WACC, we see that the ROIC barely exceeds the value of the WACC. After raising the beta from.123 to.4 in a effort to stress the model, we are left with a resulting WACC of 4.054%. With the exception of 2011, where the ROIC exceeded the WACC by almost, EXC has barely managed to record a higher ROIC than the WACC. While the margin is concerning, it does suggest that EXC is able to create value. 3. Value Creation and DCF Model EXC, Page 9 of 17 Copyright Robert A. Weigand, Ph.D., 2016
EXC DUK Duke Energy Corporation Piotroski Financial Fitness Scorecard Piotroski Financial Fitness Scorecard Positive Net Income 1 1 1 1 Positive Net Income 1 1 1 1 Positive Free Cash Flow 0 0 0 0 Positive Free Cash Flow 0 1 1 0 Growing ROA (% change NI > % change TA) 0 1 0 1 Growing ROA (% change NI > % change TA) 0 1 0 1 Earnings Quality (Operating Income > Net Income) 1 1 1 1 Earnings Quality (Operating Income > Net Income) 1 1 1 1 Total Assets Growing Faster Than Total Liabilities 1 1 0 1 Total Assets Growing Faster Than Total Liabilities 0 1 0 0 Increasing Liquidity (Current Ratio) 1 1 1 1 Increasing Liquidity (Current Ratio) 0 1 0 0 % Change Shares Outstanding < +2. 0 0 1 0 % Change Shares Outstanding (Diluted) < +2. 0 0 1 1 Expanding Operating Margin 0 1 0 1 Expanding Operating Margin 1 1 0 1 Asset Turnover (% change sales > % change assets) 0 1 1 0 Asset Turnover (% change sales > % change assets) 0 1 1 0 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 0 0 0 0 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 0 0 0 0 Piotroski Score (max = 10) 4 7 5 6 Piotroski Score (max = 10) 3 8 5 5 EXC DUK Duke Energy Corporation Altman Probability of Bankruptcy Z Score Altman Probability of Bankruptcy Z Score (Current Assets Current Liabilities)/Total Assets 359 362 429 782 ## (Current Assets Current Liabilities)/Total Assets 010 196 034 305 Retained Earnings/Total Assets 0.1511 0.1555 0.1515 0.1518 ## Retained Earnings/Total Assets 199 247 200 254 Earnings Before Interest & Tax/Total Assets 0.1218 0.1523 0.1169 0.1525 ## Earnings Before Interest & Tax/Total Assets 0.1131 0.1501 0.1452 0.1520 Market Value Equity/Total Liabilities 0.2562 0.2469 0.3072 0.2179 ## Market Value Equity/Total Liabilities 0.3017 0.3984 0.4449 0.3653 Sales/Total Assets 0.2987 0.3111 0.3171 0.3084 ## Sales/Total Assets 0.1531 0.1928 0.1941 0.1902 Altman Score 0.86 0.90 0.94 0.91 Altman Score 0.59 0.79 0.81 0.70 Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 3. Value Creation and DCF Model EXC, Page 10 of 17 Copyright Robert A. Weigand, Ph.D., 2016
31 Dec 11 31 Dec 12 31 Dec 13 31 Dec 14 31 Dec 15 EXC Utilities Report Date: April 18, 2016 Historical Income Statement Drivers Average Forecasted Income Statement Drivers 2011 2015 2016E 2017E 2018E 2019E 2020E Total Revenue 19,063 23,489 24,888 27,429 29,447 Total Revenue 30,330 30,937 31,401 31,872 32,191 % growth N/A 23.2% 6. 10.2% 7.4% 11. % growth 3. 2. 1. 1. 1. Gross Profit 6,619 5,800 6,937 6,528 8,058 Gross Profit 8,189 8,600 8,824 9,084 9,110 Gross Margin (% of sales) 34.7% 24.7% 27.9% 23.8% 27.4% 27.7% Gross Margin (% of sales) 27. 27.8% 28.1% 28. 28.3% Operating Income (EBIT) 4,487 2,900 3,689 3,060 4,408 Operating Income (EBIT) 4,550 4,764 4,961 5,163 5,151 Operating Margin (% of sales) 23. 12.3% 14.8% 11.2% 15. 15.4% Operating Margin (% of sales) 15. 15.4% 15.8% 16.2% 16. Earnings Before Tax 3,956 1,798 2,773 2,486 3,323 Income Tax Expense 1,457 627 1,044 666 1,073 Forecasted Effective Tax Rate 33. 33. 32. 32. 32. Effective Tax Rate 36.8% 34.9% 37.6% 26.8% 32.3% 33.7% Effective Tax Rate Adjustment 33. 33. 32. 32. 32. Net Income 2,495 1,160 1,719 1,623 2,269 Net Income 2,244 2,382 2,512 2,550 2,253 Net Margin (% of sales) 13.1% 4.9% 6.9% 5.9% 7.7% 7.7% Net Margin (% of sales) 7.4% 7.7% 8. 8. 7. Total Common Shares 663 816 856 860 890 Total Common Shares 917 944 973 1,002 1,032 % growth N/A 23.1% 4.9% 0. 3. 7.6% % growth 3. 3. 3. 3. 3. Earnings per Share $3.76 $1.42 $2.01 $1.89 $2.55 Earnings per Share $2.45 $2.52 $2.58 $2.55 $2.18 Dividends per Share $2.10 $2.10 $1.46 $1.24 $1.24 Dividends per Share $1.27 $1.30 $1.34 $1.36 $1.38 % growth N/A 0. 30. 15.1% 0. 12.3% % growth 2. 2. 2. 2. 1. Year end Stock Price $43.37 996 $29.74 997 $27.39 998 $37.08 999 $27.77 1000 996 997 998 999 1000 Historical Balance Sheet Drivers Forecasted Balance Sheet Drivers 2016E 2017E 2018E 2019E 2020E Cash + ST Investments 1,016 1,486 1,609 1,878 6,502 Cash + ST Investments 3,033 2,784 2,512 2,550 2,575 % of sales 5.3% 6.3% 6. 6.8% 22.1% 9.4% % of sales 10. 9. 8. 8. 8. Total Receivables 2,613 4,228 4,156 4,709 4,099 Total Receivables 5,459 6,187 6,280 6,374 6,438 % of sales 13.7% 18. 16.7% 17.2% 13.9% 15.9% % of sales 18. 20. 20. 20. 20. Inventory 864 1,014 1,105 1,603 1,566 Inventory 1,483 1,513 1,536 1,559 1,574 % of sales 4. 4.3% 4.4% 5.8% 5.3% 4.9% % of sales Net PPE 30,129 42,449 44,505 48,896 53,916 Net PPE 63,694 63,421 62,802 63,744 64,382 % of sales 158. 180.7% 178.8% 178.3% 183.1% 175.8% % of sales 210. 205. 200. 200. 200. Total Assets 54,995 78,561 79,924 86,416 95,384 Total Assets 113,739 116,014 117,754 119,520 120,716 % of sales 288. 334. 321.1% 315.1% 323.9% 316.6% % of sales 375. 375. 375. 375. 375. Payables and Accruals 2,470 4,386 4,113 4,331 5,022 Payables and Accruals 6,066 6,187 6,280 6,374 6,438 % of sales 13. 18.7% 16. 15.8% 17.1% 16.2% % of sales 20. 20. 20. 20. 20. ST Debt plus LT Debt 12,664 18,643 18,612 20,313 24,794 ST Debt plus LT Debt 30,330 30,937 31,401 31,872 32,191 % of sales 66.4% 79.4% 74.8% 74.1% 84.2% 75.8% % of sales 100. 100. 100. 100. 100. Total Equity 14,388 21,730 22,940 24,133 27,322 Total Equity 31,847 34,031 36,111 38,247 40,239 % of sales 75. 92. 92.2% 88. 92.8% 88.2% % of sales 105. 110. 115. 120. 125. Analyst Comments: Income Statement With a lot of "ifs" related to lawsuits and potential mergers, revenue was forecasted on the conservative side of analyst estimates which will also stress the model. After encountering some rather significant errors on Capital IQ with regard to gross margin, we calculated the gross margin by calculating the average margin between gross margin and operating margin and assigned gross margin to grow at a similar pace as operating margin. Each Segment has a significant amount of unrealized tax benefit and if realized, it will dramatically reduce the effective tax rate. Analysts that the net income will dip slightly in 2016, but then it will resume its increasing trend that was established in 2014. We lowered the net income in perpetuity to further stress the model. Their board does not plan to issue a repurchase program, so we felt that 3% was a good number going forward. It's slightly lower than the historical average, but the average was skewed because of 2012. The company's management has committed to a 2. dividend in each of the next 3 years and we have tapered it off in the following year and in perpetuity. Balance Sheet It is clear there is a huge jump in Cash + ST Investements in 2015, caused by the impending acquisition on Pepco Holdings. This was completed earlier this month, normalizing this forecast. Many of the "jumps" seen in the numbers are mimicking the jumps from 2011 to 2012, when Constellation was purchased. Constellation is their other retail based business, so the changes in the balance sheet should be similar with Pepco. The only driver left constant at the historical average was 4. Forecasting and Valuation EXC, Page 11 of 17 Copyright Robert A. Weigand, Ph.D., 2016
Total Revenue Operating Income (EBIT) Earnings per Share Dividends per Share Gross Profit Margin Operating Profit Margin $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 2016E 2017E 2018E 2019E 2020E $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00.50.00 2016E 2017E 2018E 2019E 2020E 4 3 3 2 2 1 1 2016E 2017E 2018E 2019E 2020E Historical Performance Forecasted Performance Total Invested Capital Total Invested Capital 2016E 2017E 2018E 2019E 2020E Cash and ST Investments 1,016 1,486 1,609 1,878 6,502 Cash and ST Investments 3,033 2,784 2,512 2,550 2,575 + Receivables 2,613 4,228 4,156 4,709 4,099 + Receivable 5,459 6,187 6,280 6,374 6,438 + Inventory 864 1,014 1,105 1,603 1,566 + Inventory 1,483 1,513 1,536 1,559 1,574 Payables and Accruals 2,470 4,386 4,113 4,331 5,022 Payables and Accruals 6,066 6,187 6,280 6,374 6,438 = Net Oper. Working Capital 2,023 2,342 2,757 3,859 7,145 = Net Oper. Working Capital 3,910 4,297 4,048 4,108 4,149 + Net Property, Plant & Equip. 30,129 42,449 44,505 48,896 53,916 + Net Property, Plant & Equip. 63,694 63,421 62,802 63,744 64,382 = Total Invested Capital 32,152 44,791 47,262 52,755 61,061 = Total Invested Capital 67,604 67,718 66,850 67,853 68,531 Total Common Shares 663 816 856 860 890 Total Common Shares 917 944 973 1,002 1,032 = Total Invested Capital/Share $48.49 $54.89 $55.21 $61.34 $68.61 = Total Invested Capital/Share $73.75 $71.72 $68.74 $67.74 $66.42 14% 12% 1 8% 6% 4% 2% Net Profit Margin Effective Tax Rate (right axis) 2016E 2017E 2018E 2019E 2020E 40. 35. 30. 25. 20. 15. 10. 5. 0. $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 Total Invested Capital Net Fixed Assets 2016E 2017E 2018E 2019E 2020E $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 Total Invested Capital Net Operating Working Capital 2016E 2017E 2018E 2019E 2020E Historical Performance Forecasted Performance NOPAT and Free Cash Flow NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E Operating Income (EBIT) 4,487 2,900 3,689 3,060 4,408 Operating Income (EBIT) 4,550 4,764 4,961 5,163 5,151 (1 Effective Tax Rate) 36.8% 34.9% 37.6% 26.8% 32.3% (1 Effective Tax Rate) 33. 33. 32. 32. 32. = Net Oper. Profit After Tax 2,834 1,889 2,300 2,240 2,985 = Net Oper. Profit After Tax 3,025 3,192 3,349 3,511 3,502 Total Invested Capital N/A 12,639 2,471 5,493 8,306 Total Invested Capital 6,543 115 (868) 1,003 679 = Free Cash Flow N/A (10,750) (171) (3,253) (5,321) = Free Cash Flow (3,517) 3,077 4,217 2,508 2,824 NOPAT per Share $4.28 $2.31 $2.69 $2.60 $3.35 NOPAT per Share $3.30 $3.38 $3.44 $3.51 $3.39 Free Cash Flow per Share N/A ($13.17) (.20) ($3.78) ($5.98) Free Cash Flow per Share ($3.84) $3.26 $4.34 $2.50 $2.74 Analyst Comments: Total Revenue and EBIT A slow, but steady increase can be seen for the revenue into the future, while EBIT remains consistent across the board. Total Invested Capital and NFA The amount of total invested capital and net fixed assets have increased consecutively as EXC acquires and builds new power plants. The acquisition of PEPCO can be seen by the sharp increase in 2016. 4. Forecasting and Valuation EXC, Page 12 of 17 Copyright Robert A. Weigand, Ph.D., 2016
Cost of Capital 2015 Weight % Cost Weighted % Dividend Discount Valuation Model Equity Capitalization $24,715 49.9% 4.724% 2.358% + Total Debt $24,794 50.1% 5.00 1.66 Year 2016E 2017E 2018E 2019E 2020E = Value of All Securities $49,509 100. Dividend Growth Rates 2. 2. 2. 2. 1. Expected Future Dividends $1.27 $1.30 $1.34 $1.36 $1.38 Effective Tax Rate 33.5 Alternative RF Rate: Risk Free Rate 1.924% 10 year Yield: 1.924% PV Dividends 1 4 $4.70 Dividend Yield 3.6% Beta (default = 5 Yr) 0.400 Alternative Beta: 5 year Beta: 0.123 PV Perpetual Div. $35.65 Market Risk Premium 7. 0.400 2 year Beta: 0.448 Intrinsic Value $40.35 If Purchased For: $35.21 CAPM Cost of Equity 4.724% Current Price $35.21 Expected Return = 8. Weighted Average Cost of Capital: 4.023% 4.023% 4.023% 4.023% 4.023% 4.023% ($35.21) $1.27 4.023% $1.30 4.023% $1.34 4.023% $44.24 4.023% $42.88 4.023% Historical Performance Forecasted Performance ROIC, EVA and MVA ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E Return on Invested Capital 8.8% 4.2% 4.9% 4.2% 4.9% Return on Invested Capital 4. 4.7% 5. 5.2% 5.1% Economic Value Added 1,541 87 399 118 528 Economic Value Added 306 468 659 781 745 Market Valued Added 14,366 2,538 506 7,756 2,607 Market Valued Added 430 30,503 27,198 25,831 24,480 EVA per Share $2.32.11.47.14.59 EVA per Share.33.50.68.78.72 MVA per Share $21.67 $3.11.59 $9.02 ($2.93) MVA per Share.47 $32.31 $27.97 $25.79 $23.73 $6,000 $4,000 $2,000 ($2,000) ($4,000) ($6,000) ($8,000) ($10,000) ($12,000) NOPAT Free Cash Flow 2016E 2017E 2018E 2019E 2020E $10 $5 ($5) ($10) ($15) NOPAT per Share Free Cash Flow per Share 2016E 2017E 2018E 2019E 2020E 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 EVA MVA (right axis) 2016E 2017E 2018E 2019E 2020E 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 5,000 Perpetual Growth Rate: 1. Historical Performance Forecasted Performance DCF Intrinsic Value Model DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E PV of Future FCFs 54,767 67,721 70,617 76,711 85,118 PV of Future FCFs 92,060 92,687 92,198 93,400 94,334 + Cash and ST Investments 1,016 1,486 1,609 1,878 6,502 + Cash and ST Investments 3,033 2,784 2,512 2,550 2,575 = Total Intrinsic Firm Value 55,783 69,207 72,226 78,589 91,620 = Total Intrinsic Firm Value 95,093 95,471 94,711 95,949 96,909 Total Debt 12,664 18,643 18,612 20,313 24,794 Total Debt 30,330 30,937 31,401 31,872 32,191 = Intrinsic Value of Equity 43,119 50,564 53,614 58,276 66,826 = Intrinsic Value of Equity 64,763 64,534 63,309 64,077 64,718 Total Common Shares 663 816 856 860 890 Total Common Shares 917 944 973 1,002 1,032 = Per Share Intrinsic Value $65.04 $61.97 $62.63 $67.76 $75.09 = Per Share Intrinsic Value $70.65 $68.35 $65.10 $63.97 $62.73 vs. Year End Stock Price $43.37 $29.74 $27.39 $37.08 $27.77 vs. Most Recent Stock Price $35.21 Over (Under) Valuation/Share ($21.67) ($32.23) ($35.24) ($30.68) ($47.32) Over (Under) Valuation/Share ($35.44) % Over (Under) Valued 33.3% 52. 56.3% 45.3% 63. % Over (Under) Valued 50.2% Analyst Comments: Dividend Discount Model EXC has agreed to increase their dividend by 2. for the next three years. If the stock were to be purchased now we could expect a return of 8. given the current undervaluation of $5. NOPAT and FCF A positive cash flow is expected in 2017 when acquisition costs of PEPCO and Constellation are fully absorbed and new capital investment growth slows. EVA and MVA The reason for the sharp increase in MVA can be related to the fact that the projected intrinsic value of the stock in 2017 is $68.35. The graph uses this value in 2017 and uses the value of $35.21 in 2016, causing an abrupt jump. DCF Intrinsic Value Model EXC has grown to be increasingly undervalued since 2011. In 2011 it was undervalued by 33%, and currently sits at an undervaluation of 5 with a 4. Forecasting and Valuation EXC, Page 13 of 17 Copyright Robert A. Weigand, Ph.D., 2016
ROIC WACC Year-End/Most Recent Stock Price Per Share Intrinsic Value $ Over (Under) Valued % Over (Under) Valued 1 8% 6% 4% 2% 2016E 2017E 2018E 2019E 2020E $80 $70 $60 $50 $40 $30 $20 $10 2016E 2017E 2018E 2019E 2020E $10 $20 $30 $40 $50 2016E 1 2 3 4 5 6 7 Historical Performance Forecasted Performance Relative Valuation Relative Valuation 2016E 2017E 2018E 2019E 2020E Price to Earnings 11.5 20.9 13.6 19.6 10.9 Price to Earnings 14.4 27.1 25.2 25.1 28.7 Price to Free Cash Flow N/A 2.3 137.2 9.8 4.6 Price to Free Cash Flow 9.2 21.0 15.0 25.5 22.9 Price to Sales 1.5 1.0 0.9 1.2 0.8 Price to Sales 1.1 2.1 2.0 2.0 2.0 Price to Book 0.5 0.3 0.3 0.4 0.3 Price to Book 0.3 0.6 0.5 0.5 0.5 Earnings Yield 8.7% 4.8% 7.3% 5.1% 9.2% Earnings Yield 7. 3.7% 4. 4. 3. Dividend Yield 4.8% 7.1% 5.3% 3.3% 4. Dividend Yield 3.6% 1.9% 2.1% 2.1% 2.2% Price to Earnings Price to Free Cash Flow Price to Sales Price to Book (right axis) Earnings Yield Dividend Yield 5 2.5 0.6 10. 5 10 2.0 1.5 1.0 0.5 0.5 0.4 0.3 0.2 0.1 8. 6. 4. 2. 15 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E 0. 2016E 2017E 2018E 2019E 2020E Analyst Comments: ROIC and WACC The return on invested capital is expected to stay above the weighted average cost of capital through 2016 and grow slightly faster than the weighted average cost of capital into the future. Earnings Yield and Dividend Yield The sharp fall in both earnings and dividend yields can be attributed to the extreme undervaluation of EXC. The graph goes from using the current share price in 2016 to using the 'Intrinsic Value' of EXC in 2017, resulting in an increased denominator and decreased sum. The undervaluation has the same affect on Price to Sales and Price to Book. 4. Forecasting and Valuation EXC, Page 14 of 17 Copyright Robert A. Weigand, Ph.D., 2016