Consolidated Edison: A Premium Valuation Ahead Of Q4 Earnings (ED)
Utility stocks have fallen to fresh 10-month lows relative to the broad market. The Utilities Select Sector SPDR ETF (XLU) has fallen back hard compared to SPY this year as a risk-on mantra reigns supreme on Wall Street. It’s a bearish trend for this defensive sector.
One major Utility sector stock reports Q4 results next week – are troubled times ahead? Let’s turn the lights on ConEd (NYSE:ED).
Utes Severely Underperforming To Start 2023
According to Bank of America Global Research, ED is the owner of Consolidated Edison Company of New York (Con Ed or CECONY) and Orange & Rockland Utilities (O&R) providing electric, gas, and steam service to over 3 million customers in New York City and the northern suburbs. ED also has two competitive businesses: ConEd Transmission (CET) and the Clean Energy Business (CEB). ED is also a co-developer of the unregulated Mountain Valley Pipeline (MVP) gas transmission asset.
The New York-based $33.0 billion market cap Multi-Utilities industry company within the Utilities sector trades at a near-market 19.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.5% dividend yield, according to The Wall Street Journal.
ConEd sold part of its business to a German group in 2022 and put on a sizable stock buyback – both of those moves are favorable for shareholders while its long-term growth rate is expected to be in the 5-7% range. So, this steady-eddy utility has some tailwinds from a management perspective. Last month, ED hiked its dividend by 2.5% but there have been some analyst downgrades of the stock, too.
On valuation, analysts at BofA see earnings rising at a solid clip for a boring old utility. 2022 EPS growth is seen at more than 5%, but below last year’s inflation rate. The good news is that earnings growth advances to 7% this year and accelerates to almost 8% in 2024 – both well above expected inflation. It’s key to recognize that most utilities are free cash flow negative, so the yield is safe given strong per-share profit growth.
Dividends, meanwhile, are expected to increase commensurate with earnings. Those are all good things, but both ED’s operating and GAAP P/E ratios are high, like with so many utes. I am a hold on valuation given the high earnings multiples but also decent growth prospects.
ConEd: Earnings, Valuation, Dividend Yield Forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2022 earnings date of Thursday, February 16 AMC. Before that, shares trade ex-div on Valentine’s Day with a pay date on Wednesday, March 15. The calendar is light on volatility catalysts aside from the reporting date.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $0.80 which would be a 20% decline from $1.00 of per-share profits earned in the same quarter a year ago. ED has a mixed earnings beat rate history, well below the S&P 500’s average beat rate near 70%. Shares have traded higher post-reporting in 6 of the last 7 reports.
Right now, the at-the-money straddle expiring soonest after the earnings date shows an implied move of just 3.0% baked into the stock price. Only once in the last 11 reports has ED moved more than that, so longs could put on a covered call a credit put spread could be a way to play somewhat high premium pricing.
ED: Mixed EPS Beat Rate History, YoY Earnings Drop Seen
The Technical Take
With a premium valuation and options that are fair to slightly expensive ahead of an expected YoY earnings dip, how does the chart look? This is a messy one. My readers know that I can usually spot solid support and resistance level pretty well, but I must be honest – do not put too much stock in this chart. The broad trend is higher, but shares have not broken out well above the pre-pandemic high of $95 that I would like to see.
Clearly, $78 to $80 is support – shares consolidated to that point in 2021, then held it on a big drawdown in 2022. $86 could be support, but a bearish false breakout is in play right now. That’d be negated by a rally above the all-time high. Overall, it’s a mixed and somewhat inconclusive chart.
ED: Messy Chart, Not A Strong Move Above the 2019 High
The Bottom Line
I’m a hold on ED due to its premium valuation but it also has decent earnings growth along with shareholder accretive activities. The chart is mixed ahead of earnings next week.