No. of Recommendations: 8
The notion that cheap natural gas is here to stay, or for instance, that gasoline will never fall below $3.50 a gallon ever again, is down to short-term thinking. Sometimes though, short-term can seem like forever. The future is hardly ever easy to predict; after all, the Stone Age didn't end because we ran out of stones.

When a source of energy is unexpectedly cheap for an extended period, the price of natural gas in this case, then invariably the rush to produce it eases off. It's just not a great proposition because there's not much of a profit margin if the stuff is retailing for cheap. This cycling happens time and again and invariably as prices rise those on the exploration end are caught short, and, as demand outstrips supply prices continue to increase. As retrofitting and conversion for natural gas continues demand will rise, and along with it, price. Therefore, it follows that Exelon will likely see an improvement in earnings at some point.

In the meantime, there are huddles to be cleared. Earnings are depressed to the extent that the dividend is in jeopardy. Not because the company literally can't pay it, but because it doesn't want to see the stock's rating downgraded. Consequently, a dividend cut is likely. Even after a cut the dividend yield will still probably be north of 4%. Earnings are expected to pick up some in 2013 when expenses related to the acquisition of Constellation Energy begin to appear in the rearview mirror.

It's reasonable to think there's a very pessimistic scenario priced into the stock below $30 a share. Exelon is the largest generator of (low cost) nuclear power in the country. Not only have low natural gas prices hurt, but presumably so has the present negative view of nuclear power given the disaster in Japan. Germany has been so spooked that it intends to do away with it's nuclear power plants altogether. Needless to say, more people are killed every year, one way or another, because of the use of coal to generate electricity than in any, or all, past nuclear facility disasters. But that's another story.

Tightening EPA emissions standards will likely benefit EXC as electricity produced by nuclear facilities is relatively clean and cheap.

For what it's worth, Morningstar considers EXC in "consider buying" territory and significantly undervalued. They estimate "fair value" at $42.00 a share. In fact, EXC is on their list of favorites for new money. Value Line, on the other hand takes a more cautious wait-and-see approach, which in effect translates as look elsewhere.

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