The Razor's Edge

2-Year Price History

Ockham's Rating

EXC Stock Evaluation

While there has not been a significant change to price or fundamental factors associated with EXC this week, the stock still receives a downgrade in the latest report. We as always are interested in analyzing any changes in fundamentals for each stock, but it is also important to get an idea of the overall valuation of the entire sector. The reason for this downgrade is that we have seen marked erosion in valuation for EXC's sector, the Utilities sector. The sector's valuation has become less attractive compared to the other sectors we rank. For more on this topic, please refer to the Peer Comparison portion of our analysis, which will highlight where the Utilities sector ranks among other sectors and also includes a peer analysis of EXC.

EXC Revenue

As a value investing shop, we are interested in seeing how EXC's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 2.50x and the low end of the range at 1.56x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for EXC of 1.93x is slightly under its historical average. This level of Price to Sales gives us a fairly neutral position on the EXC shares. We would like to see a drop in the Price to Sales ratio just a little bit more (given current sales figures) before we would become more positive on a Price to Sales basis. Such a drop would increase the attractiveness of the stock but, as always, would need to be considered in the context of all other valuation factors.

EXC Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of EXC, Ockham views their current Cash Earnings as below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for EXC, the current level of Cash Earnings compared to its historical levels helps identify where EXC is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 11.05 and a historical low Cash Earnings per share ratio of 6.93, an investor can relate where value becomes optimal.

With a historical average Cash Earnings ratio of 8.99, the current Cash Earnings ratio of 7.74 is a positive opportunity for value in the Ockham view. Naturally, we would love to see a deeper value opportunity for EXC, but to get there one of two things must occur (or both). Either the stock price must decline further to increase the long term buying opportunity, or the management at EXC needs to earn more cash. If either, or both, of these occur, then we could see a significant gap emerge between what investors were willing to pay for in the past, and where EXC is trading currently (latest close price of $56.21).

EXC Dividends

A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive Ockham rating. That being said, we don't require dividend payments for company's whose management has elected to forgo them entirely.

When reviewing dividend yields for EXC, we compare the historic high and low levels over the past, which is similar to our evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management's confidence in the company. EXC’s estimated annual dividend is $2.10 resulting in a current dividend yield of 3.74%. The highest dividend yield from EXC over recent history was 5.70% while the lowest dividend yield was 1.41%. EXC has shown confidence by hiking up the dividend yield to 5.20% above the historical median.