Down Almost 20% This Year, Is Edison International Stock Attractive?
Edison International (NYSE: EIX), a utility holding company that runs Southern California’s primary electric utility, has seen its stock decline by about 18% year to date significantly underperforming the S&P 500 which is up by about 15% over the same period. While utility stocks, in general, haven’t fared too well this year, as investors favored higher growth sectors, Edison’s performance has been further weighed down by uncertainty relating to litigation that its subsidiary Southern California Edison faces. Below, we take a look at how the company has fared in recent years and what the outlook could be like. See our analysis on What Has Driven Edison’s Stock Between 2017 and Now for more details on why Edison stock has underperformed.
Edison’s Operating Performance
Edison International’s operating results have been relatively strong in recent years. While Revenues remained fairly flat between 2017 and 2019 at about $12.3 billion, they grew to about $13.4 billion over the last twelve months, driven partly by some regulatory moves. While Net Margins improved from around 5.4% in 2017 to about 11.4% in 2019, they declined over the last twelve months on account of charges related to wildfire and mudslide events. Overall, EPS expanded from $1.73 in 2017 to about $3.78 in 2019, although it has declined over the last twelve months. Dividends – which are a key consideration for utility investors – have also been increasing steadily and the company’s dividend yield stands at over 4%. The company is also investing significantly in growing its renewables infrastructure and this could be a driver of growth in the long-run. Earlier this year, it signed contracts to add about 770 megawatts of new grid-scale energy storage. This is one of the largest energy storage contracts in the U.S. and should help to integrate renewable clean energy into the grid from intermittent wind and solar resources.
Valuation Is Being Impacted By Potential Wildfire Liabilities
While the company’s operating results have been reasonably strong with its investments looking quite promising, its P/E multiple based on last fiscal year’s results has declined from 37x in 2017 to about 16.4x currently. California based utilities have had to deal with major wildfires in the state over 2017 and 2018 and have faced growing liabilities for cases where their equipment was at fault. Southern California Edison has faced litigation in this regard. While the company took $1.8 billion in charges in Q4 2018 related to wildfire claims and saw another $1.2 billion settlement in the last quarter, the company still has more claims to deal with. Although Edison’s potential liabilities are likely far below fellow utility PG&E (which estimated liabilities at over $30 billion), significant legal and financial complexities likely remain for Edison and this is hurting the company’s valuation.
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