Goldman Sach's Exelon Bear Case Comes To An End

Exelon Corporation (NYSE: EXC) is the largest electric holding company in the U.S., with around 10 million customers. A better valuation model, potential upside to consensus estimates and few headwinds led Goldman Sachs to upgrade the equity the energy stock this week. 

The Analyst

Goldman Sachs' Michael Lapides upgraded Exelon from Sell to Neutral with a price target lifted from $40 to $43.

The Thesis

The bearish case for Exelon's stock no longer applies for three reasons, Lapides said in the upgrade note. (See the analyst's track record here.)

They are:

• An improved sum-of-the-parts valuation model.
• Potential upside versus consensus estimates.
• Minimal negative catalysts in the near term.

Goldman's sum-of-the-part valuation model derives a total value per share of $43 versus a prior $40, Lapides said. The difference comes from a more attractive valuation as earnings from the company's ExGen business increase, while net debt decreases along with a lower holding company drag.

Upside to Exelon's earnings 2019 and beyond could come from the following factors, the analyst said:

• Updated hedging.
• Improved O&M cost management at ExGen.
• Updated rate increases at the company's regulated utilities.
• Lower debt financing needs.

This year's PJM capacity auction represents a modest headwind, as the market appears to be oversupplied, Lapides said.

Litigation around Exelon's nuclear subsidies remains a risk over the longer-term and could be worth 25 cents per share in EPS through 2020, according to Goldman Sachs.

Nevertheless, there are few negative catalysts in the near-term, Lapides said. 

Price Action

Shares of Exelon were trading higher by 1.2 percent Thursday morning.

Related Links:

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Exelon's Mystic Station power plant in Everett, Massachusetts. Photo by Fletcher6/Wikimedia.