We expect Exelon’s regulated utilities to drive all of our earnings growth through 2025. The segment’s four-year, $27 billion capital investment plan supports 7.5% rate base growth and 6%-8% utility earnings growth.
Exelon’s generation continues to be a primary concern and the reason we value the company at a discount to its peer regulated utilities. As the largest nuclear power plant owner in the United States, Exelon has suffered as low natural gas prices slashed power prices. The company has shown its political clout, winning price subsidies in Illinois, New York, and New Jersey to keep some of its nuclear fleet running. Illinois recently approved clean energy legislation that will subsidize the Byron and Dresden nuclear facilities.
Illinois lawmakers passed energy legislation that would provide subsidies worth $700 million to Exelon’s Dresden and Byron nuclear plants. Gov. J.B. Pritzker has indicated he plans to sign the legislation, and Exelon has said it is in the process of refuelling both plants.
Financial Strength:
Management has done a good job paring down its nonutility debt. Only about 15% of Exelon’s consolidated debt is directly tied to its generation segment. As long as power markets remain relatively stable and Exelon maintains its investment-grade ratings, we don’t expect the company to have trouble refinancing its near-term maturities. Continued power market weakness could make refinancing more difficult and stress Exelon’s credit metrics.
Balance sheet is expected to remain sound and in line with regulatory requirements, supported by the company’s low revenue cyclicality. Exelon’s operating leverage is somewhat higher than its regulated utility peers’ due to its merchant generation unit.
Exelon’s dividend policy to pay out 70% of regulated earnings is appropriate, given the high quality and relatively stable nature of its regulated assets.
Bulls Say:
- Exelon’s proposed divestiture of its merchant generation unit would eliminate its earnings sensitivity to cyclical commodity prices that have dragged down returns recently.
- The company’s regulated utilities have good growth investment opportunities that should support earnings and dividend growth.
- The state subsidies that management has secured for a portion of its nuclear portfolio are a positive for shareholders
Company Profile:
Exelon serves approximately 10 million power and gas customers at its six regulated utilities in Illinois, Pennsylvania, Maryland, New Jersey, Delaware, and Washington, D.C. Exelon owns approximately 31 gigawatts of generation capacity throughout North America.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
although the impact on high-margin roaming revenue was notable. The cost-out program is back on track, with management in February 2021 increasing the T22 cost-out target by the end of fiscal 2022 to AUD 2.7 billion, from AUD 2.5 billion previously. Telstra is the leading telecommunications services provider in Australia. It has dominant market share in each service category and customer segment, and enjoys cost advantages which underpin its narrow moat rating.
Telstra is not the cheapest provider of telecommunications services but is the lowest-cost provider resulting in earnings before interest, taxes, depreciation and amortisation, or EBITDA, margins of over 30%. As the National Broadband Network, or NBN, is rolled out, the traditional copper and cable networks will be progressively decommissioned. Compensation payments amount to an after-tax net present value of AUD 11 billion. Mobile market share of 44% remains well ahead of rivals Optus and Vodafone at 35% and 21% respectively. Competitive advantage in coverage and speed of the Telstra mobile network attracts customers demanding reliable mobile connectivity.
Financial Strength
Telstra’s balance sheet is strong. Net debt/EBITDA was 2.0 times at the end of June 2021, while EBITDA interest cover was 13.2 times. The strong capital position and cash flow allows spectrum acquisition and renewals, as well as network reinvestment, to be debt-funded.
Bulls Say’s
- Telstra has market-leading shares across all vital telecommunications segments and is likely to maintain these positions in the future.
- While the telecommunications space is incredibly competitive, Telstra has a significant competitive advantage via its extensive mobile and wireless networks.
- Decommissioning of the copper network lowers capital intensiveness of the business. Telstra can redirect capital to the higher-growth mobile segment.
Company Profile
Telstra is Australia’s largest telecommunications entity, with material market shares in voice, mobile, data and Internet, spanning retail, corporate and wholesale segments. Its fixed-line copper network will gradually be wound down as the government-owned National Broadband Network rolls out to all Australian households, but the group will be compensated accordingly. Investments into network applications and services, media, technology and overseas are being made to replace the expected lost fixed-line earnings longer term, while continuing cost-cuts are also critical.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2020 revenue, up from 43% in fiscal 2017. In our view, Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware.
The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and we see Cisco as the only one-stop-shop networking vendor. Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is the preferred method of consumption for cloud-based resources.
Financial Strength
Cisco a financially healthy Company. With a fiscal 2021 debt/capital ratio of 22%, abundant free cash flow generation, and expected on-time debt payments. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001, has increased the authorization over time, had about $8 billion remaining at the end of fiscal 2021, with no termination date.
Cisco has recurrently raised its dividend year over year, and modest annual increases. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and we expect strong operational and free cash flow generation to continue in the future. Our view is that Cisco will manage its growing war chest with future cash deployments into strategic developments and acquisitions.
Bulls Say’s
- Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds.
- Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings.
- The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. We foresee Cisco’s hardware as needed for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.
Company Profile
Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The infrastructure platforms group includes hardware and software products for switching, routing, data center, and wireless applications. Its applications portfolio contains collaboration, analytics, and Internet of Things products. The security segment contains Cisco’s firewall and software-defined security products. Services are Cisco’s technical support and advanced services offerings. The company’s wide array of hardware is complemented with solutions for software-defined networking, analytics, and intent-based networking. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.