01 December 2009

EIX: Financial Gauge Analysis for the September 2009 Quarter

In a previous article, we examined Edison International's (NYSE: EIX) Income Statement for the third quarter of 2009 and compared the entries on each line to our "look-ahead" estimates.  Earnings in this period, which ended 30 September 2009, fell from $1.34 to $1.22 per share.  Non-GAAP "Core" earnings per share slipped from $1.46 to $1.09.

Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated our usual set of Cash Management, Growth, Profitability and Value metrics.  This post reports on the metrics and the associated financial gauge scores.

Edison International, the parent of Southern California Edison and Edison Mission Group, is one of the largest investor-owned, regulated electric utilities in the U.S.  Some background information about Edison International and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Edison's latest quarterly results produced the following changes to the gauge scores:

  • Overall: 21 of 100 (down from 26)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash ManagementSep 2009Jun 2009Sep 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)31.329.930.531.7
Working Capital/Invested Capital4.1%9.5%5.0%5.8%
Cash Conversion Cycle Time (days)16.414.514.112.7
Gauge Score (0 to 25)1895

The three-month decreases in the Current Ratio and Working Capital ratio led to the Cash Management gauge's fall in the third quarter.

We immediately noticed Working Capital's $1 billion decline (about 5 percent of Invested Capital) during the third quarter, from $1.8 billion on 30 June 2009 to $800 million on 30 September 2009.  However, the decline is not a significant concern because Edison's Working Capital, which is the difference between Current Assets and Current Liabilities, has a long history of wide quarter-to-quarter variations.  In addition, Edison's Working Capital reached what might be a record high (our records go back to 1994) during the second quarter of 2009; it returned to a more typical level in the third quarter.

Long-term Debt increased earlier in the year and hit $11.3 billion on 30 June.  As a percentage of Equity, the debt was still low by historical standards.  Long-term debt is now $10.45 billion, with the decrease partially the result of maturing debt moving from long-term to short-term status.

Total debt, short and long, now represents 4.3 years of Cash Flow from Operations, which is very close to the five-year average.

Days of Sales Outstanding, which tracks Accounts Receivable, is within its normal range.  The Cash Conversion Cycle Time has lengthened, which hints at reduced Cash Management efficiency.

GrowthSep 2009Jun 2009Sep 20085-Yr Avg
Revenue growth-10.6%-3.7%8.2%3.8%
Operating Profit growth-4.7%-3.2%7.8%3.1%
CFO growth28.2%-9.7%-37.6%12.3%
Net Income growth-29.8%-29.0%1.0%-0.5%
Gauge Score (0 to 25)5138
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 Revenue. 

The decline in trailing-year 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."

The gauge score improved solely because of Cash Flow from Operations.  In the September quarter, this measure of performance rose from $900 million to $1.2 billion.  On a trailing year basis, the increase was from $2.1 billion to $2.7 billion.  The 10-Q (pages 109-110!) explains the change, which seems to center on "ERRA [energy resource recovery account] balancing account collections" and "other regulatory balancing accounts."

ProfitabilitySep 2009Jun 2009Sep 20085-Yr Avg
Operating Expenses/Revenue81.3%80.7%82.1%80.8%
Free Cash Flow/Invested Capital-2.4%-2.9%-3.9%1.5%
Accrual Ratio0.7%0.5%4.4%1.0%
Gauge Score (0 to 25)5426

Operating Expenses are consistent with historical results, but returns on invested capital are flagging.

Greater Cash Flow from Operations, discussed above, relative to reported earnings is seen in the improved Accrual Ratio (lower is better) from one year ago.

Value Sep 2009 Jun 2009 Sep 2008 5-Yr Avg
P/E 12.9 11.6 10.8 12.3
P/E vs. S&P 500 P/E 0.6 0.6 0.6 0.7
PEG N/A N/A 1.4 1.1
Price/Revenue 0.9 0.8 0.9 1.1
Enterprise Value/Cash Flow (EV/CFO) 7.4 8.1 10.6 8.3
Gauge Score (0 to 25) 8 9 9 4
Share Price ($) $33.58 $31.46 $39.90 -

Edison's share price increased 6.7 percent during the third quarter.  Even though the September price remained 16 percent less than one year earlier, the steeper 30-percent fall in Net Income caused the Price/Earnings multiple to expand from about 11 last September to almost 13.

Counterbalancing this downward pressure on the Value gauge, the Price-to-Revenue remained attractive relative to its five-year average.  The Enterprise Value /Cash Flow multiple became more tempting.

OverallSep 2009Jun 2009Sep 20085-Yr Avg
Gauge Score (0 to 100)21262522

The gauge scores turned in a mixed performance during the third quarter, with the Cash Management gauge weakening on a big drop (although not necessarily troubling) in Working Capital.  Improved Cash Flow provided a minor boost to other scores; however, this is primarily due to regulatory accounts.

Full disclosure: Long EIX at time of writing.

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