Electric Utilities: Revenues are Relative to Financial Confidence

Just a quick follow-up to my piece yesterday about China's mobile telecom business. The New York Times reported today that cell phone knock-offs are rampant throughout China and I believe that feeds directly into the growth of mobile telecom subscribers in China. Instead of paying $500 (USD) for an Apple iPhone in Shenzen, you can buy an illegal Chinese reproduction called a 'Hi-Phone' (that looks very similar to the iPhone) for $20 (USD) on the street.

According to the Times, technological advances have allowed hundreds of small Chinese companies, some with as few as 10 employees, to churn out what are known here as 'shanzhai' or black market cell-phones. Instead of 'Samsung' the knock-off is called a 'Sumsung' and a buyer need only purchase a mobile plan and they're in business.

While Nokia (the world's biggest cell phone maker) is working with the Chinese government in Beijing, China has done little to stop the proliferation of fake mobile phones, which are even advertised on late-night television infomercials with pitches like "One-fifth the price, but the same function and look," or patriotic appeals like "Buy shanzhai to show your love of our country."

There was an unusual rise in electric utility stocks yesterday so I thought I would have a look. Couldn't find a reason. No national energy plan press releases from Congress or the White House, no over-abundance on the grid segments, no greedy Enron-esque energy-traders on the floor manipulating share prices. I haven't looked at this energy sector in a long time, so I persisted in nosing around the percentage gains of some of the top utilities companies.  

What I found was business as usual. The big caps were making money and the small caps were either trying to expand their market and/or heading in an alternative direction.

As my colleague Karen Riccio pointed out yesterday in her excellent piece on Pharmaceutical companies, waters flows down from the top and the major players on the major exchanges, at generally expensive share costs, use the 'trickle down' theory for innovation relying a good deal on small cap stocks to come across future 'plays' (and positioning themselves to be bought up by the big houses at a later date). So too, with the major suppliers of electricity and the mostly local and regional small cap players in the market.

Two big cap companies I like (because they pay a five year average dividend of four and four and half percent respectively) are American Electric Power Company (AEP) and Duke Energy (DUK). Looking at American Electric, I came across an interesting revenue killer I hadn't considered. Industrial output.

Last Friday, American Electric told investors its first-quarter profit fell 37 percent as higher rates in some regions couldn't offset slumping industrial demand. The Columbus-based utility said it earned $360M, or 89 cents a share, in the first three months of the year. That compares with $573M or $1.43 a share, last year, (which included a $163M gain on a court settlement).

Excluding one-time items such as last year's settlement, AEP's earnings are still down 12 percent from a year ago. Revenue in the quarter was flat at $3.5B, the company said.

CEO Michael Morris said in a release. "Residential sales remain reasonably strong, and we will continue to benefit from positive rate decisions at several of our operating companies, including $679 million in rate decisions already this year."

One of those rate decisions was approved last month by the Public Utilities Commission of Ohio and calls for increases ranging from six percent to eight percent annually for this year through 2011 for Columbus Southern Power Co. and Ohio Power Co. customers

American Electric Power Company http://www.aep.com/ operates in the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia, and West Virginia and they deliver electricity to more than 5 million customers in 11 states and last year earned $1.38 billion on $14.6 billion in revenue. And they had a 37 percent decline in revenues? That's some industrial base of customers.

Trading in the $26 range, American Electric has a market cap of approximately $10.71B and is trading near its 52 week low of $24. The Company's 50-day moving average is in the $26 range and its 200-day moving average is only $29 and change. The outstanding shares and the float ratio are at near parity and those numbers lead me to think that while companies like GM shut down plant after plant and the American industrial base re-tools, when the turnaround comes in 09 and 2010, as production ramps up to confidence, a buy now will mean a profit then.

I believe this is also true with Duke Energy (DUK) http://www.duke-energy.com. Like American Electric, Duke sells electricity across a broad swath of geography including: central and western North Carolina, western South Carolina, southwestern Ohio, Indiana, and northern Kentucky. Duke supplies electric service to approximately 4 million residential, commercial, and industrial customers.

Duke trades in the $13 range with a $17B-plus market cap. It too is near its yearly low of $11.72 and its 50-day moving average is in its current trading range (its 200-day moving average is $14.77). Duke's outstanding shares and float at near-parity and has a trailing twelve month revenue of $12.93B and a trailing twelve month revenue per share of $10.22.

In looking at Duke I was reminded of a key investment component in buying shares of utility companies; regulation (Duke Energy Carolinas is looking at its options to challenge the N.C. Utilities Commission on a ruling that cancelled a 10-year, $500M contract with the city of Orangeburg, S.C.).

Regulation and access were always two chinks in the armor of utility investment strategies. By access, I mean that a lot of regional small caps in the business, like Connecticut Light & Power Company (CNLPL), Wisconsin Electric Power (WELPP) and Alabama Power (ALPVN) issue 'preferred' stock that is held back from public trading for a dozen different reasons.

There are some small cap opportunities in the electric utility business that aren't providers as such, but service and operation experts that trade on the bulletin board and are liquid (reducing investor risk).

American DG Energy (ADGE) http://www.americandginc.com/ is a good bet at $3 a share. American produces revenues in the distribution, ownership, and operation of on-site energy systems that produce electricity, hot water, heat, and cooling. At the end of 2008, American had installed energy systems, representing approximately 4,240 kilowatts and 32.4 million British thermal units of heat and hot water, as well as 600 tons of cooling.

American has been around since 2001 and is headquartered in Waltham, Massachusetts. It has a market cap of approximately $102M, is trading near its 52 week high and above its 50-day and 200-day moving averages. Its trailing twelve month revenue average is $6.58M. American's shares outstanding and float ratio is bit estranged, but nothing to be alarmed about.

I also like Acorn Energy (ACFN) http://www.acornfactor.com/ over on the Nasdaq. It's a service company that offers catalyst cleaning, rejuvenation, and regeneration technologies and services for coal-fired power plants that use selective catalytic reduction systems to reduce nitrogen oxide emissions. Coal provides half of the electricity produced in the U.S. and Acorn seems to have found a niche.

American has a market cap of $28M and is trading at approximately $2.46 these days, closer to its 52-week low of $1.30 than its 52-week high of $6.59. Acorn shares are right in line with both its 50-day and 200-day moving average and its outstanding shares versus float ratio is at near-parity. Trailing twelve month revenues are $20.70M and trailing twelve month revenues per share are $1.82.