Worst S&P 500 Performer of the Week - Edison International
$EIX
Edison International (EIX) has experienced a significant decline in its stock price this week, primarily due to the ongoing wildfires in the Los Angeles area. The company's subsidiary, Southern California Edison (SCE), has implemented Public Safety Power Shutoffs (PSPS) to mitigate fire risks, affecting a substantial number of customers.
The wildfires have led to widespread power outages, with reports indicating that nearly 328,000 customers were without electricity as of Thursday morning. This operational challenge has raised concerns about potential liabilities and the financial impact on the company, contributing to the stock's downturn.
Despite these challenges, some analysts have adjusted their outlook on Edison International. Ladenburg Thalmann, for instance, upgraded the stock from a 'Sell' to a 'Neutral' rating, albeit with a reduced-price target of $56.50 from $61. They believe the current stock price reflects a reasonable worst-case scenario related to wildfires.
Edison International Overview
Edison International is the parent company of Southern California Edison (SCE), one of the nation's largest electric utilities, serving approximately 15 million people in Central, Coastal, and Southern California. The company operates primarily through two segments:
Electric Utility: Involves the generation, transmission, and distribution of electricity.
Energy Services: Provides energy solutions, including renewable energy and energy efficiency services.
Edison's strategic initiatives focus on transitioning to cleaner energy sources, enhancing grid reliability, and implementing advanced technologies to meet evolving customer needs and regulatory requirements.
Key Bets
Revenue Growth and Earnings Guidance: Edison International reported strong financial performance in 2024, with third-quarter core earnings per share (EPS) of $1.51, bringing the year-to-date core EPS to $3.88. The company has narrowed its 2024 core EPS guidance to $4.80 to $5.00 and remains confident in achieving its 2025 EPS guidance, projecting a 5% to 7% EPS compound annual growth rate (CAGR) through 2028.
Total Addressable Market (TAM) Expansion: Edison International is investing in infrastructure to support California's clean energy goals, including over $2 billion in capital investments under the California Public Utilities Commission (CPUC) jurisdiction and more than $2 billion in Federal Energy Regulatory Commission (FERC) transmission projects in development. These investments aim to enhance grid reliability and integrate renewable energy sources, potentially expanding the company's market reach.
Regulatory Approvals and Cost Recovery: The company has secured a settlement agreement for the recovery of 60% of the costs associated with the Tehachapi Renewable Transmission Project, amounting to $1.6 billion. This approval is expected to provide incremental cash flow of $3 billion over the coming years, strengthening the company's financial position.
Key Risks
Wildfire Liability: Edison International faces significant financial risks due to potential liabilities from wildfires caused by its equipment. Under California's "inverse condemnation" law, utilities can be held liable for wildfire damages regardless of fault. Recent wildfires have heightened investor concerns, leading to stock price volatility.
Regulatory Environment: The company's operations are heavily regulated, and changes in state or federal policies, including those related to cost recovery and environmental standards, could impact profitability. While recent approvals have been favorable, future regulatory decisions remain uncertain.
High Capital Expenditures and Debt Levels: Edison International has substantial capital expenditure plans to upgrade infrastructure and support clean energy initiatives. These investments require significant funding, and the company has reported negative free cash flow, with capital expenditures exceeding operating cash flow. Additionally, high debt levels could pose financial challenges.
Financial Metrics
Leadership Overview
Pedro J. Pizarro, President and Chief Executive Officer: Pedro Pizarro has been with Edison International since 1999, holding various leadership roles, including President of Edison Mission Energy and President of SCE. He became CEO in 2016 and has been instrumental in steering the company's clean energy and infrastructure investment strategies.
Maria Rigatti, Executive Vice President and Chief Financial Officer: Maria Rigatti oversees the financial operations of Edison International. She has been with the company for several years, contributing to financial planning, risk management, and strategic investments.
Adam S. Umanoff, Executive Vice President and General Counsel: Adam Umanoff serves as the chief legal officer, responsible for overseeing the company's legal affairs, including regulatory compliance and corporate governance.
Caroline Choi, Senior Vice President, Corporate Affairs: Caroline Choi leads the company's corporate affairs, focusing on public policy, government relations, and corporate communications.
Peer Comparison
The recent challenges faced by Edison International, driven primarily by the devastating wildfires in Southern California, show the complex risks associated with utility companies in fire-prone regions. The operational disruptions caused by widespread power outages, compounded by the looming threat of wildfire-related liabilities, have significantly impacted investor confidence, as reflected in the company's stock performance. While some analysts believe the current valuation already accounts for a worst-case scenario, the uncertainty surrounding the timeline and magnitude of potential liabilities leaves the company in a precarious position.