Why Are Insiders at This Power Company Behaving So Bullishly?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Consolidated Edison (NYSE: ED) is one of the oldest U.S. companies trading in the markets today. “Con Ed,” as it is known to avid fanboys, was founded in 1823 as the New York Gas Light Company, and began trading on the NYSE one year later. For the better part of the twentieth century, Con Ed was a single-dollar stock, though deregulation of the utility industry in New York pushed its shares above $50 by the late nineties. Since the recession, Con Ed has seen its value appreciate by more than 40%, and now flirts with an $18 billion market cap.

Thus far in 2012, shares of the electric, gas, and steam power provider have been a middling investment, losing 2.6%. More recently, the stock has seen analysts’ opinions diverge with regard to its attractiveness, as Credit Suisse issued an “underperform” downgrade earlier last week, while Argus upgraded Con Ed to a “buy” rating. Initial reports show that Credit Suisse’s main concern with the stock is its valuation.

At its current share price in the $60 range, Con Ed trades at a multiple of 16.7 times earnings, which is a shave above the utilities industry average (16.6X), and more expensive than its own five-year historical average P/E of 14.4X. The company’s +15% premium above its intermediate historical average compares unfavorably to peers like Pepco (NYSE: POM) at -50.9%, Duke Energy (NYSE: DUK) at +11.4%, and Southern Company (NYSE: SO) at +10.7%. In fact, of its closest competitors, only Northeast Utilities (NYSE: NU) at +49.0%, is more expensive than Con Ed’s five-year historical average.

Another factor working against Con Ed is its slowing earnings growth, which averaged 3.8% annually over the past half-decade, but is expected to barely squeak above 3% a year over the next five years. By comparison, competitors like Pepco (4.6%), Duke (3.5%), Southern (5.4%), and Northeast (5.7%) are all expecting more rapid bottom line growth over the intermediate term. Factoring this estimated growth into the equation, we can see that Con Ed also sports a stratospheric PEG ratio of 5.20; typically any figure above 2.0 signals overvaluation. Even more importantly, Con Ed’s PEG is above the likes of Pepco (4.09), Southern (3.45), and Northeast (3.71).

Despite these concerns, there are a few factors in play that can push shares of Con Ed out of their current glut. First off, the company has beaten the Street’s earnings estimates in four of the past five quarters, most recently in Q2, when it reported a positive surprise of 3.1%. In the two days following the announcement, Con Ed flirted with $65 a share. By the end 2012′s third quarter, analysts expect the company to generate EPS of $1.36, up $0.03 year-over-year.

Q3 results are expected to be announced in early November, and investors will also get a peak at forward-looking guidance. As is the case with any power company operating in the northeastern U.S., winter weather will play a significant role in Con Ed’s revenues, most notably in its steam division. Last year, a milder than normal winter was partially responsible for disappointing revenues from this segment, though 2012-2013 estimates are looking more promising. Ninety-day forecasts predict that the northeast will have snowfall slightly below average levels, but that temperatures will be frigid, between 2 and 3 degrees below long-range norms. Throw in the fact that the company will begin to offer natural gas to businesses in the greater New York City area, and it’s very possible that we could see further earnings beats over the next two quarters.

Though investors should remain cautious about the stock’s current valuation, it’s important to consider the role that EPS beats may play on Con Ed’s stock price. As empirical studies have shown, investors who mimic or “monkey” a company’s most prominent insiders can beat the market by an average of 7% a year. We can’t think of a more important group of Con Ed insiders than the ten mentioned above. But don’t take our word for it, check out its Form 4 filings in Insider Monkey’s comprehensive database.

This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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