Just How Overvalued is ConEd?
There has been a lot of talk about how utility stocks are overvalued, and I agree with it. I thought I would put together a little free cash flow analysis of one of the most well-known of the Utes in order to illustrate the issue: Consolidated Edison (ED).
The resulting link is here; that spreadsheet is my standard sheet, which I try to keep pretty simple.
By my calculation, which is generous in terms of the starting free cash flow figure it gives to ED, you can roughly say that ED is fairly valued if it manages to grow free cash flow at a rate of 4%/year for the next ten years. That is with no margin of safety. To buy with a 20% margin of safety you would need to pay $42.82/share, whereas as of this writing it trades just shy of $60.
But here’s the thing: ED has had NEGATIVE free cash flow in six of the last ten years! And if you average out its free cash flow over the last five years, it has averaged about $54.5 million in free cash flow per year. Keep in mind that my above valuation assumes a starting point of $757 million in free cash flow, because that is the trailing twelve month figure. I ask you, do you think ED is going to do 4% free cash flow growth for the next ten years, from that baseline? Morningstar, it should be noted, does think ED will have positive free cash flow through 2016, four more years, so that at least is something. But I think it’s a little optimistic to think that Ed is going to grow this much, and there is certainly no room for error.
Oh and the dividend yield is about the same as Intel’s as of this writing.
No thank you.