Edison International (NYSE: EIX) a utility holding company that runs Southern California’s primary electric utility, continues to underperform the broader markets, with its stock declining around 10% year-to-date, compared to the S&P 500 which is up by around 4% in the same period. Edison stock has been weighed down mainly by litigation in California, as electric equipment owned by utilities has been tied to multiple severe wildfires in the state in recent years. However, in late January, the company made significant progress towards resolving pending wildfire-related litigation, as its principal subsidiary Southern California Edison reached a $2.2 billion settlement on a claim relating to a large wildfire in Malibu in 2018, while also finalizing settlements for fires and mudslides that occurred in 2017. The settlements were largely in line with expectations, and help to remove a lot of uncertainty relating to the company’s overall liabilities relating to the past incidents.
So why isn’t the stock moving up? Investors seem to think the utility business in Southern California is risky. With California seeing almost persistent drought and higher temperatures in recent years, fires have been a regular occurrence due to a buildup of dry vegetation. Approximately 27% of Southern California Edison’s service territory is in areas identified as a high fire risk, putting it at risk of future liability. [1] The company also says that residential and commercial development is occurring in some of the most vulnerable areas, potentially increasing the risk for the company.
See our analysis on What Has Driven Edison International’s Stock Between 2017 and Now for more details on why Edison stock has underperformed.
[12/23/2020]
Edison International
Edison’s Operating Performance
Edison International’s operating results have been relatively strong in recent years. While Revenues remained fairly flat between 2017 and 2019 at about $12.3 billion, they grew to about $13.4 billion over the last twelve months, driven partly by some regulatory moves. While Net Margins improved from around 5.4% in 2017 to about 11.4% in 2019, they declined over the last twelve months on account of charges related to wildfire and mudslide events. Overall, EPS expanded from $1.73 in 2017 to about $3.78 in 2019, although it has declined over the last twelve months. Dividends – which are a key consideration for utility investors – have also been increasing steadily and the company’s dividend yield stands at over 4%. The company is also investing significantly in growing its renewables infrastructure and this could be a driver of growth in the long-run. Earlier this year, it signed contracts to add about 770 megawatts of new grid-scale energy storage. This is one of the largest energy storage contracts in the U.S. and should help to integrate renewable clean energy into the grid from intermittent wind and solar resources.
Valuation Is Being Impacted By Potential Wildfire Liabilities
While the company’s operating results have been reasonably strong with its investments looking quite promising, its P/E multiple based on last fiscal year’s results has declined from 37x in 2017 to about 16.4x currently. California-based utilities have had to deal with major wildfires in the state over 2017 and 2018 and have faced growing liabilities for cases where their equipment was at fault. Southern California Edison has faced litigation in this regard. While the company took $1.8 billion in charges in Q4 2018 related to wildfire claims and saw another $1.2 billion settlement in the last quarter, the company still has more claims to deal with. Although Edison’s potential liabilities are likely far below fellow utility PG&E (which estimated liabilities at over $30 billion), significant legal and financial complexities likely remain for Edison and this is hurting the company’s valuation.
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