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Introduction

Entergy Corporation (ETR) is an $23.25 billion company in the personal & household industry. Market capitalization competitors in this industry include Duke Energy, PPL Corporation, and FirstEnergy. The electric utilities industry is down 11.81% over the past year compared to the S&P 500 which is down 12.73% during the same period. Over the past month, the industry has been down 0.06%, while the S&P 500 has been down -6.13%. 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, utility stocks like Entergy will see future benefits. Also Entergy's growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Entergy produces. According to Reuters, Entergy, “is an integrated energy company engaged primarily in electric power production and retail electric distribution operations." For the most part, Entergy owns powerplants with the capacity to be a nuclear power generator in the US. Granted it isn't taking the benefits of being a multinational company, reeking the benefits of the low US dollar, but Entergy is banking on being a strong utility company during times of economic uncertainty. More specifically to location, Entergy focuses on Arkansas, Louisiana, Mississippi, and Texas. And more specifically to business segments, Entergy is involved with utility and non-utility energy. The utility generates, transmits, distributes, and sells electric power while non-utility owns nuclear plants and sells the power from those plants to wholesale customers.

Growth

Entergy has illustrated solid growth prospects over the past year. According to Reuters, Entergy reported a $11.48 billion revenue product last year. This number is up over 5.40% than it was the previous year. Compared to the industry’s average of 1.12%, investors see the relative strength compared to other competitors. This number is respectable to the company’s five year average of 6.70%. Moreover, competitor annual averages of 3.42% (PPL Corp) and 8.32% (Duke Energy) are lower than Entergy's current figures. Entergy's earnings grew at a strong 12.44% last year—a number much higher than the company's five year average (16.24%), industry average, and competitor averages. Competitors such as FirstEnergy only saw a 3.23% increase and PPL Corp saw a disappointing decrease in earnings.. Therefore, both earnings and revenue growth is strong for Entergy.

In addition, Entergy has kept its costs under control. According to Reuters, Entergy has reported gross, operating, and net profit margins of 15.82%, 19.08%, and 10.77% respectively over the past year. Moreover, these numbers are above the industry averages of 2.35%, 1.65%, and 1.17%, respectively. The numbers are also above or near the company’s five year average respective numbers of 14.65%, 17.19%, and 9.86%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor First Energy's respective operating and net income averages of 26.26%, and 18.27%. The same comparison can be made for PPL Corp and Duke Energy. Therefore, Entergy 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, Entergy reported an ROE of 15.88%. Therefore, out of all shareholder equity, more than 16% (above five year average of 12.07%) comes from earnings instead of debt or stock. This number is much stronger compared to the industry average of 1.31%, and the number is better than some competitor averages 14.98% (FirstEnergy) and 7.84% (Duke Energy). Therefore, Entergy 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 Entergy cannot continue its success. The same logic applies to Entergy's 3.87% ROA (above industry average) 4.21% 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. Entergy has a forward P/E ratio of 16.63 and a price to sales ratio of 1.99 compared to the industry’s respective 1.37 and 0.21, which shows a relatively undervalued status. In comparison, the rest of the market cap competitors have ratios that are higher than Entergy. FirstEnergy has a forward price to earnings ratio of 18.95 and price to sales ratio of 1.86. Moreover, PPL Corp does not even have a P/E ratio, illustrating the company's poor earnings. What makes Entergy’s figures more enticing is these competing firms aren’t growing so strongly as Entergy. Entergy can now be seen as both a growing and valued company. Moreover, Entergy has a relatively low PEG (1.44) ratio compared to other competitors’ numbers as well.

Efficiency

Entergy is efficient. Inventory turnover at 8.84 is strong compared to other industry market-cap rivals (PPL). Moreover, asset turnover is also strong at 0.36 compared to competitor figures (0.56 average). Receivables turnover was at 18.03 (above industry's 0.56), but cash is not an issue for Entergy. In terms of liquidation, Entergy's current ratio is at 1.23. This number is a bit risky, but the company’s capital expenditures have increased (5.46%) which means further increases in capacity, and economies of scale may be present in the future, because of this financing. Moreover, institutions own 95.48% of all Entergy 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. There is also a dividend rate of 2.48% which is above the industry average of 0.07%.

Technical Analysis

Entergy performed flat in the past year. The company’s share price has increased 9.06% year-to-year. This type of growth is good 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 105 dollar share price range dating back to late March 2008. The last time Entergy reached this amount the company rebounded and appreciated 14.09%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Entergy 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 23.12, 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 Entergy according to technical analysis, purchasing shares will still produce strong long terms gains.gains.

Conclusion

Entergy 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
June 13th, 2008