Earnings Preview: Pepco Holdings

Utility service provider Pepco Holdings Inc. (POM - Analyst Report) is slated to release its second-quarter 2012 earnings results before the market open on August 7, 2012.

First Quarter Performance

Pepco Holdings Inc. reported first quarter 2012 earnings of 30 cents per share, beating the year-ago figure of 28 cents and the Zacks Consensus Estimate of 25 cents. The year-over-year growth stemmed from investments made in its utility infrastructure, which yielded robust transmission and distribution revenues. Favorable income tax adjustments also benefited results.

Total revenue at the end of the first quarter was $1.29 billion, down 20.9% from $1.63 billion in the year-ago period. The year-over-year decline was due to lower contributions from all the three operating segments of the company.

Total operating expenses at the end of the first quarter of 2012 were $1.15 billion versus $1.48 billion in the year-ago period. The decline stemmed from lower fuel and purchase energy costs. Operation and maintenance expenses also dipped marginally from the prior-year quarter.

Guidance 2012

Pepco Holdings reiterated its 2012 earnings per share guidance in the range of $1.15 to $1.30. The guidance excludes the impact of discontinued operations and assumes normal weather during the year.

Zacks Consensus

The Zacks Consensus Estimate for the second quarter 2012 is 32 cents per share, down 23.8% from 42 cents reported in the year-ago quarter. The current Zacks Consensus Estimate ranges between 29 cents per share and 39 cents per share.

The full year 2012 Zacks Consensus Estimate is $1.23, down 1.78% from $1.25 reported in the previous year. The current Zacks Consensus Estimate ranges between $1.18 per share and $1.25 per share.

Estimate Revisions Trend

Agreement

The past 30 days have seen one of six estimates declining for the second quarter, while none moved in the opposite direction. There were no changes in the quarterly estimates in the last 7 days.

For full year 2012, of the 9 available estimates, there has been 1 revision each, in the positive and negative direction, in the last 30 days. There were no changes in the estimates in the prior 7 days.

Magnitude

The Zacks Consensus Estimate for the second quarter inched down by 4 cents in the last 30 days. Similarly, for full-year 2012, the consensus estimate dropped by a penny in the past 30 days. For the past 7 days the consensus earnings estimates remained static both for the second quarter and full year 2012.

Surprise History

With respect to earnings surprise, the company’s performance was mixed in the last four quarters. The results of the company surpassed our expectation in two of the last four quarters, while earnings fell short of expectation in the other two quarters.

The earnings surprise in the last four quarters ranged from (16.67%) to 35.48%. The average surprise over the last four quarters remained a positive 6.05%.

Our Recommendation

Pepco Holdings has gradually modified itself to become a pure play regulated utility through divesting its unregulated businesses. The company continues to make significant investments in its service territories to improve the distribution and transmission systems and provide better services to its consumers. The current dividend yield of 5.4% is above the industry average of 3.3%.

Like other regulated utility operators, this company too suffers from fluctuating weather conditions in its service territories. We believe the adherence to existing and new regulatory developments in its service territories will increase the operating costs of the company and impact margins.

Evaluating the pros and cons, we have decided to retain our Neutral recommendation of the company. Pepco Holdings Inc. competes with CMS Energy Corp. (CMS - Analyst Report), Calpine Corp. (CPN - Snapshot Report) and NiSource Inc. (NI - Analyst Report). The company has a Zacks #3 Rank implying a short-term Hold rating on the stock.

Based in Washington, District of Columbia (DC), Pepco Holdings Inc. engages in both regulated utility and unregulated businesses. Pepco Holdings Inc., also referred to as PHI, is one of the largest energy delivery companies in the Mid-Atlantic region, delivering power to customers in Delaware, the District of Columbia, Maryland and New Jersey. It also supplies natural gas to customers in Delaware.