Consolidated Edison, Inc., through its subsidiaries, engages in regulated electric, gas, and steam delivery businesses in the United States. The company offers electric services to approximately 3.4 million customers in New York City and Westchester County; gas to approximately 1.1 million customers in Manhattan, the Bronx, parts of Queens, and Westchester County; and steam to approximately 1,649 customers in parts of Manhattan. It also supplies electricity to approximately 0.3 million customers in southeastern New York, and northern New Jersey; and gas to approximately 0.1 million customers in southeastern New York. The company operates 532 circuit miles of transmission lines; 15 transmission substations; 62 distribution substations; 85,514 in-service line transformers; 3,913 pole miles of overhead distribution lines; and 1,764 miles of underground distribution lines, as well as 1,865 miles of mains and 104,748 service lines for natural gas distribution. In addition, it owns, operates, and develops renewable and energy infrastructure projects; and provides energy-related products and services to wholesale and retail customers, as well as invests in electric and gas transmission projects. It primarily sells electricity to industrial, commercial, residential, and governmental customers. Consolidated Edison, Inc. was founded in 1884 and is based in New York, New York.
FINANCIAL RATIOS of Consolidated Edison (ED)
|Price to Sales||2|
|Price to Book||1.7|
|Price to Tangible Book|
|Price to Cash Flow||7|
|Price to Free Cash Flow||-14.2|
|Sales Growth Rate||-3.8%|
|Sales - 3 Yr. Growth Rate||%|
|EPS Growth Rate||%|
|EPS - 3 Yr. Growth Rate||%|
|Capital Spending Gr. Rate||53.8%|
|Cap. Spend. - 3 Yr. Gr. Rate||13.7%|
|LT Debt to Equity||103.1%|
|Total Debt to Equity||110.7%|
|Return On Assets||3.6%|
|Ret/ On Assets - 3 Yr. Avg.||3.5%|
|Return On Total Capital||4.3%|
|Ret/ On T. Cap. - 3 Yr. Avg.||4.4%|
|Return On Equity||9.1%|
|Return On Equity - 3 Yr. Avg.||9.1%|
|Gross Margin - 3 Yr. Avg.||0%|
|EBITDA Margin - 3 Yr. Avg.||28.4%|
|Oper. Margin - 3 Yr. Avg.||19.1%|
|Pre-Tax Margin - 3 Yr. Avg.||14.4%|
|Net Profit Margin||10.3%|
|Net Profit Margin - 3 Yr. Avg.||9.4%|
|Effective Tax Rate||35.9%|
|Eff/ Tax Rate - 3 Yr. Avg.||34.6%|
ED stock valuation input parameters
Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ED stock intrinsic value calculation we used $12075 million for the last fiscal year's total revenue generated by Consolidated Edison. The default revenue input number comes from 2016 income statement of Consolidated Edison. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.
Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
We use three input parameters to forecast the revenue growth rate in our ED stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.
Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
The initial discount rate of 8%, whose default value for ED is calculated based on our internal credit rating of Consolidated Edison, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Consolidated Edison.
By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.
Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ED stock the variable cost ratio is equal to 80.7%.
Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ED stock. These expenses increase with the level of inflation in subsequent years.
Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.4% for Consolidated Edison.
Corporate tax rate of 27% is the nominal tax rate for Consolidated Edison. In reality, companies find ways to pay much less taxes than that or not to pay them at all.
Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ED stock is equal to 0%.
Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ED are equal to 23%.
Life of production assets of 2.6 years is the average useful life of capital assets used in Consolidated Edison operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.
Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ED is equal to -1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.
Book value of equity - $14298 million for Consolidated Edison - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.
Shares outstanding of 304.79 million for Consolidated Edison is needed to calculate the intrinsic value of one share.
Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Consolidated Edison at the current share price and the inputted number of shares is $24.2 billion.
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