It’s another hot one today – 105 right now, according to weather.com, and heading up to 108 later today. A good time, then, to continue our analysis of how to profit from the heat.
One thing that was left out of the previous post and that you always want to consider is how a prospective investment measures up to comparable investments. PG&E looked good based on our analysis but we can’t really know for sure until we compare it to a comparable utility.
In th case of PG&E that comparable utility is Southern California Edison. Whereas PG&E serves a population of 15 million in northern and central California, Southern California Edison serves a population of 13 million in southern California (check out the cool Electric Utility Services Areas map). (According to the US Census California’s 2005 population is 36 million. These two utilities, therefore, provide electricity to almost 80% of California’s population).
So how is Southern California Edison’s business?
Southern California Edison (NYSE: EIX – the holding company is called Edision International) shares closed today (Monday July 24) at $41.37. With 331 million diluted shares outstanding that gives it a market cap of about $13.7 billion. Add $7.5 billion in net debt and you have an enterprise value around $21 billion – about the same as PG&E.
In 2005, Southern California Edision had $11.8 billion in revenues, $2.2 billion in operating cash flow and about $350 million in free cash flow – again pretty similar to PG&E. Based on these numbers, Southern California Edison’s enterprise value to operating cash flow multiple is 9.6 – in line with PG&E’s 9.0 multiple. It’s enterprise value to free cash flow multiple of 61.4 is significantly higher than PG&E’s 36.0.
What about Southern California Edison’s 1st quarter? It had $2.751 billion in revenues compared to $2.446 billion in last year’s 1st quarter, a 12.5% increase. From that revenue it was able to generate $608 million in operating cash flow, compared to $315 million in last year’s 1st quarter, and $55 million in free cash flow compared to -$62 in free cash flow in last year’s 1st quarter.
Southern California Edision pays a quarterly 27 cent dividend for a 2.61% current annual yield.
Interestingly, according to MSN Money, Goldman Sachs also owns a stake in Southern California Edison, 9 million shares amounting to about 2.7% of the company. That compares to its 20 million share, 5.7% stake in PG&E.
All in all, based on PG&E’s somewhat superior trailing enterprise to free cash flow ratio for 2005 (36.0 to 61.4), it’s far superior 1st quarter ($1.129 billion in operating cash and $553 million in free cash compared to Southern California Edison’s $608 million in operating cash and $55 million free cash) and it’s higher dividend, PG&E strikes me as the superior investment.
This comparison of PG&E with a comparable utility makes us more confident in our opinion that PG&E represents good value.