A Financial Analysis of Edison International


As the economy looms into uncertainty, many investors are cautious of whether to invest in stocks or not. Unfortunately, there is no perfect way to assess how every company will perform. Therefore, it may not be a bad idea to invest a bit more conservatively, and there is not better sector to do so than in the utilities.

The electric utilities industry is the perfect example of investing conservatively. Composed of many large, small, and middle capitalization companies, only a few of these equities have the real potential to not only offer the advantage of small volatility, but have enough momentum to carry its share price gradually to the upside. One company which fits this mold can be attributed to the 17.41B large-cap equity, Edison International (EIX). This company has performed very well over the past decade and should continue to do so given Edison's business model and fundamental success.

Before looking at the financial figures, it is always important to go over a company's business plan. Looking at information provided by Reuters, Edison, a holding company, "operates in three segments: an electric utility operation segment, a non-utility power generation segment and a financial services provider segment." More specifically, these three areas can be divided into some of Edison's subsidiaries. The first subsidiary, South Californian Edison Company (SCE), configures the actual distribution and transmission through a large portion of Southern California. Sending energy to both commercial and residential areas, sales from this section of Edison's model are greater than if the company operated in a different state. According to the Energy Information Administration, in 2006, California had an average energy retail price of 13.55 cents per kilowatt-hour. In 2007 this number grew to 14.32—a 5.68% increase. In addition, counting in relation to all 50 other states, California places eighth with regards to price. While this statistic may not please consumers, higher energy prices, especially since California has seen higher than expected temperatures this summer, will mean more revenue and profit for Edison.

In addition to the general idea of supplying energy, Edison also uses another subsidiary, Edison Mission Energy (EME), which holds its own other subsidiary, "power marketing and trading subsidiary, Edison Mission Marketing & Trading, Inc. (EMMT)" which "markets the energy and capacity of EME's merchant generating fleet." Basically this subsidiary of Edison International focuses on the financial trading of commodities. This region encourages the trading of forwards, futures, options, and swaps. Edison uses a lot of this capital to make further investments worldwide with the Edison Capital subsidiary dealing with "energy and infrastructure projects, including power generation, electric transmission and distribution, transportation and telecommunications." While many investors may prefer a more standard business model, Edison's share price has performed quite well with this organization. Since the start of 2007, Edison's share price has appreciated over 18% after growing nearly 5% in 2006. In fact, since 2001, Edison's share price has only fallen once during a calendar year. However, this came during the year of 2002 when all equities were falling quite harshly. Nevertheless, with such growth over the past year, some investors may believe this company is overvalued. However, given the financial background and expectations, investors should be highly overweight regarding this company because the strong potential the company has.

Nevertheless, while the business model for Edison looks solid, it is important to also examine the financial strength of the company. According to Reuters, Edison made over $12.62 billion over the past twelve months. This number is within one to two billion dollars with respect to Edison's industry market-cap competitors, Entergy, FirstEnergy, and American Electric Power Company during the same time period. However, what differentiates Edison from these other industry components is attributed to margins. Over the past twelve months Edison provided gross margins of 64.63% and operating margins of 19.63%—where the latter was nearly 3% higher than the five year average of 16.67%. These numbers not only respectively beat the industry's figures at 36.08% and 17.87%, but beat Entergy's (15.99%), FirstEnergy's (30.45%) gross margins and American Electric Power's (15.51%) and Entergy's (16.43%) operating margins as well.

Given similar revenue and market-cap performances between these four companies, margins are outstanding for Edison and indicate strong growth from years prior. In addition, sales growth have also escalated over the past twelve months to 5.15% from a five year average of 2.67% a—a number not only higher than the industry average of 3.39%, but a number increasing from previous years which cannot be said of the industry. In addition, sales growth was also higher than all three other aforementioned rivals by a significant margin. EPS growth over the past year of 12.56%, while a bit below industry figures, still have more than doubled compared to a five year average of -14.91%. This continues to indicate further evidence of either economies of scale or new growth for Edison. Lastly, capital spending for Edison at a five year growth rate of 22.14% is excellent compared to the industry average of 3.17%. This number is not only higher than FirstEnergy (4.75%), Entergy (5.77%), and American Electric (16.47%), but indicates more cash in the future for Edison. More spending on supplies, equipment or other fixed assets means more free cash flow in the future—a luxury Edison ironically already has. More cash in the future could mean higher dividend yields for investors or potential stock buybacks—only making this company more lucrative as a long term investment.

Given the great growth story of Edison, many investors may argue that the rational expectations theory of the markets yields to the assumption that investors have cashed in from the news. Nevertheless, if this idea was true, then this equity would be overvalued. However, looking at some multiples, a different argument can be made. While it is true that 2007 forward P/E ratio, according to Reuters, of 15.53 is a bit higher than the trailing number of around 14.53, this multiple is still lower than the industry average at around 17.50. Moreover, the ratio is also below Entergy's ratio of 17.54 and very near the other two competitor's multiples as well. However, since Edison has not had a great history of EPS growth results, it is maybe more fair to look at multiples as well. Forward 2007 price to sales figures for Edison at 1.33 are lower than both Entergy (1.63) and First Energy (1.52) and the same as American Electric (1.33). With Edison beating analyst expectations for EPS over the past three quarters, another quarter of good earnings should be in viable reach of Edison. Therefore, despite a lowered earnings multiple for the expected year, all other companies in this industry are expecting the same result, and Edison still comes out with an oversold valuation.

Looking at a few more intangible financial figures for Edison, investors will see even more resilient numbers. CEO and Chairman John E. Bryson along with his 16,139 employees have done a good job using equity and investment capital as a higher net profit over the years has led to an ROE of 16.50% and an ROI of 4.36%. Both these figures are above five year averages, industry averages, and each of the three aforementioned industry competitor's averages. The company remains very solvent with a 1.26 current ratio in its most recent quarter and also has a fairly low debt to equity level of 1.25 as well—both better than the industry. Receivable turnover of 13.87 is above the industry average and inventory turnover is also quite high compared to rivals American Electric and FirstEnergy.

Overall the company has performed very well and should continue to do so in the short and long term. However, as some investors are a bit wary of uncertain economic conditions, there should be some relief that Edison promotes a nice dividend yield of 2.17%. In terms of technical indicators, there is not too much support for short term gains, but there may be a hint of divergence, looking at a six-month chart, as a fast stochastic high-low and a low-low share price—a potential upswing—is possible in the near future for this company. Given this technical indicator along with good fundamental and business model support, investors should absolutely consider investing in Edison International.

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