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Investment Analysis Clubs / The BMW Method


Subject:  Re: Excelon - EXC Date:  12/24/2012  10:17 AM
Author:  HaltCatchFire Number:  40866 of 42233

The other issue are low gas and electricity prices. I'd like to know if anyone has thoughts on this stock.

Merry Christmas!

Exelon makes its money generating electricity via nuclear power plants. The immediate problem facing nuclear power is that natural gas is at historic lows, is cheaper to supply, and can be ramped up and down quickly to match peak demand loads. Longer-term concerns are the risk of a meltdown a la Fukushima, and the regulatory risk that brings; the capital needed to maintain the plants; the age of the existing nuclear power plants; and the extremely long time it takes to bring a new nuclear power plant on line, including permitting, inspections, and overcoming NIMBY concerns.

The immediate concern, which Barron's points out, is that earnings are contracting down to 100% of dividend payout. If earnings cross that threshold, the odds are very good the dividend will be cut. (Or bonds will be issued to pay the dividend, which is worse in my opinion.) The short term trend makes it likely that the dividend will be cut, which will in turn drive the stock price lower.

The longer-term concern is that the new-found wealth in natural gas is a game-changer, that lower cost electricity is a permanent situation, and the BMW assumption that the business is basically the same has been violated. Honestly I don't know the answer to that. I can't tell you that we'll continue to produce natural gas at the current rate, or that the environmental impact of fracking will stop the development of this resource, or what.

This is a good BMW pick only if you think natural gas production is not a game-changer in the electrical generation market. And if you can't answer that question, this may be one to walk away from.


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