25 August 2009

EIX: Financial Gauge Analysis through the June 2009 Quarter

In an earlier post, we examined Edison International's (NYSE: EIX) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Edison lost $0.05 per share on a GAAP basis in the second quarter of the year. 

"Core" earnings slipped from $0.79 to $0.78 per share.  GAAP results, unlike Core, include a $262 million "charge from finalizing a global settlement with the Internal Revenue Service in May 2009 and the related termination of cross-border, leveraged leases."

We have since mined Edison's 10-Q financial statements to update the metrics we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.

In summary, Edison International's latest GCFR gauge scores are as follows:
  • Overall: 28 of 100 (down from 34)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash ManagementJun 2009Mar 2009Jun 20085-Yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)29.826.229.732.2
Working Capital/Invested Capital9.5%4.6%-3.2%5.8%
Cash Conversion Cycle Time (days)12.815.811.411.9
Gauge Score (0 to 25)8576

The three-point rise in the Cash Management gauge score was due to improved liquidity, as seen with the higher Current Ratio and the greater amount of Working Capital (i.e., Current Assets - Current Liabilities).  The rise in Long-term Debt was one source of funds.  Edison's Cash Flow from Operations was $2.36 billion in the last year, which was 10 percent less than in the previous four quarters.

The efficiency metrics have stabilized, with Days of Sales Outstanding now almost exactly the same as in June 2008.

GrowthJun 2009Mar 2009Jun 20085-Yr Avg
Revenue growth-5.1%2.9%6.6%5.6%
Operating Profit growth-3.2%-0.6%11.7%7.8%
CFO growth-9.7%-24.2%-31.6%9.9%
Net Income growth-29.0%1.6%5.7%-2.6%
Gauge Score (0 to 25)1168
1. Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. 
2. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Lower demand for power and the resulting lower prices for energy products have cut deeply into Edison's top-line Revenue and Cash Flow.  The decline in Net Income was exacerbated by charges "from finalizing a global settlement with the Internal Revenue Service in May 2009 and the related termination of cross-border, leveraged leases."

ProfitabilityJun 2009Mar 2009Jun 20085-Yr Avg
Operating Expenses/Revenue80.5%81.8%82.1%80.5%
Free Cash Flow/Invested Capital-2.9%-3.1%-1.9%1.3%
Accrual Ratio0.5%4.1%3.8%0.7%
Gauge Score (0 to 25)4236

Returns are down, despite the reduction in operating costs to normal levels.  The improved Accrual Ratio (lower is better) is anomalous because it was due to non-cash charges reducing reported earnings.

ValueJun 2009Mar 2009Jun 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)101614

Edison's stock price increased 9.2 percent during the second quarter, from $28.81 to $31.46.  This was a little too much for the Value gauge, and it responded negatively. 

Edison's valuation ratios can be compared with other Electric Utilities.

OverallJun 2009Mar 2009Jun 20085-Yr Avg
Gauge Score (0 to 100)28341221

The Value gauge's decline pushed the already weak Overall gauge score down another 6 points.  The Growth and Profitability scores are in the poorest condition of the category gauges.

Full disclosure: Long EIX at time of writing.

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