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Introduction

Consolidated Edison (ED) is a $10.83 billion company in the electric industry. Market capitalization competitors in this industry include Progress Energy, AES Corporation, and Xcel Energy Brands. The electric utility industry is up 34.43% over the past year compared to the S&P 500 which is down 14.25% during the same period. Over the past month, the industry has been down 4.78%, while the S&P 500 has been up 1.10%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, electric utility stocks like Consolidated Edison will see future benefits. Also Consolidated Edison’s growth and valuation illustrate the potential for a strong earnings report next quarter

Business

This section describes what Consolidated Edison produces. According to Reuters, Consolidated Edison’s “principal business segments are its regulated electric, gas and steam businesses.” New York is a large portion of the company’s revenue stream. In fact the aggregate capacity for its services reaches 704 megawatts at a given time. Most of the revenue comes from electric operations, while gas falls in second and steam falls in third. Nevertheless, there are some other operations of this company. The orange and rockland utilities focus on transmission and distribution facilities. In addition, the competitive energy businesses focus on selling capacity through other utilities. Overall, Consolidated Edison is a relatively safe business model operating in a relatively highly-populated environment (New York).

Growth

Consolidated has illustrated solid growth prospects over the past year. According to Reuters, Consolidated reported a $13.12 billion revenue product last year. This number is up over 10.64% than it was the previous year. Compared to the industry’s average of 0.93%, investors see the relative strength compared to other competitors. This number is higher than the company’s five year average of 9.07%. Moreover, competitor annual averages of 6.70% (Progress) and 7.45% (Xcel) are similar to Consolidated’s current figures. And given that Consolidated’s five year average of 9.07% is consistent to the industry’s five year average of 2.23%, this company has the potential to move even higher. Consolidated’s earnings grew at a strong 11.29% last year—a number much higher than the industry average. Competitors such as Tupperware only saw an increase of 9.70% and Clorox saw a disappointing increase in earnings of 25.15%. Therefore, both earnings and revenue growth is strong for Consolidated.

In addition, Consolidate has kept its costs under control. According to Reuters, Consolidated has reported gross, operating, and net profit margins of 32.78%, 13.92%, and 7.38% respectively over the past year. Moreover, these numbers are above the industry averages of 2.05%, 1.27%, and 0.91% respectively. The numbers are also above or near the company’s five year average respective numbers of 32.67%, 13.65%, and 6.52%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor AES’s respective operating and net income averages of 12.69%, and 7.43%. The same comparison can be made for Progress and Xcel. Therefore, Consolidated has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors.

Compiling all this information together and investors comes across ROE. Over the past year, Consolidated reported an ROE of 11.09%. Therefore, out of all shareholder equity, more than 11% (near five year average of 9.90%) comes from earnings instead of debt or stock. This number is much stronger compared to the industry average of 1.01%, and the number is better than some competitor averages of 8.14% (Progress) and 9.86% (Xcel). Therefore, Consolidated has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Consolidated cannot continue its success. The same logic applies to Consolidated’s 3.54% ROA (above industry average) and 4.05% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. Consolidated has a forward P/E ratio of 10.84 and a price to sales ratio of 0.80 compared to the industry’s respective 0.98 and 0.16, which shows a relatively overvalued status. In comparison, the rest of the market cap competitors have ratios that higher than Consolidated. AES has a forward price to earnings ratio of 17.27 and price to sales ratio of 0.71. What makes Consolidated’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as Consolidated. Consolidated can now be seen as both a growing and valued company. Moreover, Consolidated has a relatively low PEG (0.85) ratio compared to other competitors’ numbers as well.

Efficiency

Consolidated is efficient. Inventory turnover at 23.66 is strong compared to other industry market-cap rivals (Progress). Moreover, asset turnover is also strong at 0.48 compared to competitor figures. Receivables turnover were at 11.23, but cash is not an issue for Consolidated In terms of liquidation, Consolidated’s current ratio is at 0.71. This number is a bit risky, but the company’s capital expenditures have increased (5.23%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 95% of all Consolidated shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The dividend rate of 6.03% is also high.

Technical Analysis

Consolidated performed below average in the past year. The company’s share price has decreased 15.83% year-to-year. This type of growth is normal for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 35 dollar share price range dating back to late July 2008. The last time Consolidated reached this amount the company rebounded and appreciated 13%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Consolidated illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Consolidated according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Consolidated Edison is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
August 15th, 2008