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Report example for FPL GROUP INC. (27Dec2009)
Technical Analysis
I have changed and linked a daily chart(right link in the table) as at the moment I only perceive a probable retracement between top boundary 56.2 and bottom boundary 52.8 in a rectangle intermediate area that should give opportunity to enter swings trading ; it seems that area around 52.0 is not comfortable to FPL.
An occurring break down from 52.0 price could bring FPL to test support at 48.7
I have linked an interactive chart for your use. (left side of the table)
FPL Stock Evaluation
There has been relatively little movement in price for FPL over the last week. Furthermore, there has been no revision to earnings expectations or guidance. For more detail please read the rest of my analysis of FPL's valuation.
Summary
I believe that there is extremely useful information to be gleaned from historical evidence. When a stock is out of line with historical norms it could definitely be a signal that it is overvalued or undervalued. But as proponents of the Efficient Market Hypothesis will tell you, the market is never wrong about stock prices because everything that can be known about a stock has already been priced in. However, in extreme cases, such as the Tech bubble in the early 2000’s or more recently the credit crisis demonstrates there are certainly times where historical evidence can be misleading. Episodes such as this do prove that times of great market correction either positive or negative can be driven by factors outside of fundamentals.
When a sector is as hot as the Utilities sector is right now, I am certainly a little bit more cautious about recommending buying any stocks that have become too expensive. As this NYSE has continued to make gains in the recent weeks and months, I have become more suspicious on the whole. However, as of this report I am satisfied to simply affirm my Undervalued rating. Please continue reading this report for a full explanation of my reasoning.
First, FPL decreased in price by 2.90% since 12/12/2009 and this does not greatly impact my outlook.
Second, there have been no significant adjustments in earnings expectations or guidance.
FPL Revenue
Cash earnings is the most important factor in my analysis, but it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic I look very closely at revenue numbers as my second most important factor in valuing a company's stock. I have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, FPL the high and low end of the Price to Sales per share ratios are 1.85x and 1.23x respectively.
Notice that FPL's current Price to Sales per share ratio is 1.41x, which is somewhat below its historical weighted average by 9%. Given this level of sales per share, I suggest a neutral share price forecast. To the extent there is a further drop in the Price to Sales ratio from current levels, which would occur through some combination of increased sales per share or a decline in share price, I would only become more positive about the Price to Sales ratio outlook.
FPL Cash Earnings
Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. FPL is significantly below its historical average multiple of cash earnings . Similar to my analysis of sales per share, I look at the last 10 years of cash earnings levels for FPL to identify where the current high and low price levels have been historically in relation to profit per share. Again, I utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides me with an average high Price to Cash Earnings ratio per share of 9.28 and a 6.21 low over the same period.
Now that FPL’s current price is $54.62 and its Price to Cash Earnings ratio is 5.34, I am very positive on its outlook from the cash earnings perspective. In fact, FPL is now trading a full 31% below its average historical Price to Cash Earnings ratio at these profit per share levels.
FPL Dividends
A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive rating. That being said, I don't require dividend payments for company's whose management has elected to forgo them entirely.
When reviewing dividend yields for FPL, I compare the historic high and low levels over the past, which is similar to the evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management's confidence in the company. FPL’s estimated annual dividend is $1.89 resulting in a current dividend yield of 3.46%. The highest dividend yield from FPL over recent history was 5.27% while the lowest dividend yield was 2.25%. The current dividend yield is below the historical median, which is slightly off-putting. I am a bit adverse to FPL from this valuation metric.
Evaluating Management
In evaluating management, I focus on three key measures, which combined,
produce Return on Equity (ROE). These measures are the investing of company
assets, the use of leverage, and the day to day operation of the business. Below
I summarize where each of these measures are currently compared to their
average levels over the last five years. This gives a good indication of the
strengths and weaknesses of each area.
Asset Turnover Ratio
In analyzing the first area for evaluating management I need to look at
whether FPL’s management is efficiently investing company assets. For this
purpose I look at calculating the Asset Turnover Ratio (ATO) which consists of
sales divided by assets. At a rate of 0.37x at their last reporting, this
measure of management’s investing ability is moderately below its 5 year
average.
Leverage
The second way to evaluate management is to look at their financing
activities, which shows whether the management of FPL is being effective in
their use of leverage. For this I utilize the Assets to Equity Ratio. FPL’s
last reported Assets to Equity Ratio was 3.84x which is above its historical
5-year average. It is important to remember that, while higher leverage can be
acceptable, management must adequately justify the change with increasing sales
and earnings.
Profit Margin
The third measure of management effectiveness is profit margin, which for FPL
is currently significantly above its 5 year average. Profit Margin (MGN) is the
most visible as well as most popular measure of management efficacy and is
computed by dividing earnings by sales. With a last reported Profit Margin of
9.99%, FPL is significantly above it’s historical average over the last five
years by 17%.
Notes for Management
While each of these measures is useful by themselves, the combination (i.e.
ROE) is the ultimate indicator of management effectiveness for FPL. Most firms
generate an after-tax ROE of somewhere between 10% and 20% with an average of
about 15% per year. In the case of FPL, at its last reporting, the ROE of 14.00%
was moderately below the average but does not cause concerning at this time.