wall street trends, speculation and myths dave parker senior utility analyst
TRANSCRIPT
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Wall Street Trends, Speculation and Myths
Dave Parker
Senior Utility Analyst
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What Drives Wall Street?
Information World/National Events Economic Data Company/Sector Specific News The Rumor Mill – Chat Rooms,
etc.
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Efficient Market?
Yes, short term Information overload can create
knee jerk reactions CNBC effect
The Sky Theory Trees rarely grow to the sky The sky rarely falls
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Information Filter
95 96 97 98 99 00 01 02 03
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Indexed Prices9/30/94 = 1009/8/94 to 9/9/04
NASDAQ INDEX COMPOSITECOMPNEW STANDARD & POORS 500 INDEX NEWSPXCLIENT:DISTRIBUTION
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Switching from Bear to Bull
Credibility Accountability Predictability Irrational Pessimism Long-term investing dead?
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Buy and Hold/ Market Timing
Buy S&P 500 bottom/sell top - 400% actual 140%
Recent 52-WeekPrice Price
Company Ticker 9/7/04 Range 3 MO 6 MO 1 YR 2 YR 5 YR 10 YR
UGI Utilities UGI 35.74 35.74 - 28.85 14.5 10.8 21.9 64.7 201.1 412.2
MDU Resources MDU 25.50 25.70 - 21.85 9.8 10.9 15.1 67.4 83.3 373.2
Southern Company SO 30.65 31.00 27.44 5.9 2.5 10.9 18.0 135.7 365.1
NJ Resources NJR 41.80 42.40 - 35.76 7.4 9.7 18.0 41.2 95.4 359.5
Exelon EXC 37.68 37.78 - 29.76 14.7 13.3 30.0 81.8 116.7 349.4
Sempra SRE 37.19 37.19 - 26.36 9.3 14.5 29.4 77.5 110.8 327.0
Entergy ETR 61.05 61.62 - 50.64 12.4 5.9 16.0 59.6 146.3 313.5
Energy East EAS 24.70 26.05 - 21.64 5.3 3.0 16.7 34.9 21.6 312.2
So Jersey Ind SJI 46.35 46.95 - 37.73 10.2 12.2 24.1 55.8 97.2 311.5
ONEOK OKE 23.94 27.70 - 19.20 12.0 5.4 17.6 33.8 86.5 309.3
PP&L Resources PPL 48.30 48.39 - 38.88 13.7 4.8 23.2 54.5 108.8 303.3
Total Return
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Sleeping Easier
95 96 97 98 99 00 01 02 03
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Indexed Prices9/30/94 = 1009/8/94 to 9/9/04
NASDAQ INDEX COMPOSITECOMPNEW STANDARD & POORS 500 INDEX NEWSPXCLIENT:DISTRIBUTION
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Investors’ Perspective
Sky is going to fall. Why? Uncertain
Terrorism, War, US/World political Uncertainty, Inflation, Deflation, Rising Interest Rates….
Directionless market a plus for utility stocks
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Utilities Outperform
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
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Indexed Prices9/9/03 = 1009/9/03 to 9/10/04
NASDAQ INDEX COMPOSITECOMPNEW STANDARD & POORS 500 INDEX NEWSPXCLIENT:UTILITYSECTOR
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Big Change From Bull Market
1998 1999 2000
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Indexed Prices3/20/98 = 1003/19/98 to 4/3/00
UTILITYSECTORNEW STANDARD & POORS 500 INDEX NEWSPX
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Sector Positives
Significant investment needed to improve reliability and keep up with demand growth
Regulators are lowering risk by pre-approving projects
Improving financial fundamentals reflecting Back-to-Basics strategy
Sector again focused on what they do well
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Rewarding Back to Basics Strategy
1999 2000 2001 2002 2003 2004
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Indexed Prices9/10/99 = 1009/9/99 to 9/10/04
DIVERSIFIEDDISTRIBUTIONCLIENT:COMMODITY
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Rewarding Back to Basics
Total Return Total Return
Company Ticker 3 MO 6 MO 1 YR 2 YR 5 YR Company Ticker 3 MO 6 MO 1 YR 2 YR 5 YR
Williams WMB 0.4 18.7 33.4 301.3 -66.3 El Paso EP 18.3 15.2 11.6 -41.4 -74.9AES Corp. AES 4.7 13.9 40.4 261.2 -69.1 SEMCO Enterprises SEN -14.9 -13.2 23.4 -33.9 -52.1Edison International EIX 10.0 15.8 45.9 150.5 17.8 NUI Corp. NUI -0.4 -21.1 -16.1 -30.3 -36.3PGE Corp PCG 3.2 4.5 24.8 148.6 6.6 Aquila ILA -21.8 -30.0 10.5 -23.0 -84.5Dynegy DYN 4.3 1.2 21.3 140.6 -73.1 Calpine CPN -5.8 -34.6 -35.3 -21.1 -69.4Xcel Energy XEL 5.5 1.2 22.9 132.4 0.3 Allegheny Energy AYE 1.3 13.2 58.7 -14.6 -47.5Reliant Resources RRI 1.4 21.2 88.6 112.8 TECO Energy, Inc. TE 12.7 -9.2 17.0 -6.4 -15.6Westar Energy WR 8.6 6.4 20.8 94.7 29.0 CMS Energy Corp. CMS 11.8 4.8 34.6 -4.2 -69.9Exelon EXC 14.7 13.3 30.0 81.8 116.7 TXU Corp TXU 16.0 53.4 96.6 -2.2 37.0
2 YEAR
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Boring Utility Returns
UTILITY TOTAL RETURN
Recent 52-WeekPrice Price
Company Ticker 9/7/04 Range 3 MO 6 MO 1 YR 2 YR 5 YR 10 YR
S&P 500 sp50 1121.30 1163.23 - 990.36 -1.7 -3.1 9.8 25.4 -17.0 138.1
NASDAQ comp 1858.56 2153.83 - 1750.82 -8.0 -9.2 0.0 43.5 -34.5 143.2
Dow Utility Index dj15 293.56 294.34 - 241.65 6.6 4.4 20.5 25.2 -6.7 60.6
S&P Utility Index SP825 127.73 127.73 - 107.56 7.3 3.0 17.8 22.5 -20.0
Philadelphia Utility Index uty 334.31 334.44 - 280.11 7.3 3.5 19.0 23.5 4.9 53.8
Distribution Index 7.8 2.3 18.7 23.0 41.8 146.5
Diversified Services Index 3.3 -1.6 15.5 10.7 23.2 122.0
Commodity Index 6.9 5.3 29.3 -20.2 -4.8 69.7
Total Return
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Near-Term Challenges
Stock prices at upper end of expected trading range
Mild weather most likely will pressure 3Q04 EPS
Kerry not a fan of lower taxes on dividends
Short interest is at record highs
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Appendix
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Why Own A Utility Stock?
IncomeSafetyPredictable returnsWidow’s and Orphan’s Stocks
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Distribution
Highly regulated provides slower but steady EPS growth
Higher yields Lower risk Returns in line with historical
utility returns
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Diversified Services
EPS growth above utility average, EPS can have peaks and valleys
More price volatility but tracks ups and downs of utility sector
Appeals to investors looking for some yield but understand total return = yield + price appreciation
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Commodity
Big swings in EPS performance with changes in electricity commodity prices
Limited yield due to EPS volatility
Trading like cyclical stocks, tracking economy’s ups and downs
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What Fuels Investors’ Optimism
Substantial investment returns Long term – quarter or two Key issues typically overlooked
Risk for potential reward What goes up won’t always go up What goes up will come down What goes down, can go up
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Deregulation Changes Landscape Limited regulation so significant upside
potential as demand outpaced supply
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr
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Indexed Prices1/3/00 = 1001/3/00 to 5/1/01
SP500 SOFTWARE&SERVICES .GSP705NEW STANDARD & POORS 500 INDEX NEWSPXCOMMODITY
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Deregulation Changes Landscape Limited regulation so significant downside
potential supply outpaced demand
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
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Indexed Prices5/1/01 = 1005/1/01 to 9/6/02
SP500 SOFTWARE&SERVICES .GSP705NEW STANDARD & POORS 500 INDEX NEWSPXCOMMODITY
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“Boring” Is Good
In a Bear market investors want certainty
No news, better than average chance of meeting EPS estimates
Yield – Yes please
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Risk/Reward for Differing Strategies
1999 2000 2001 2002 2003 2004
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Indexed Prices9/10/99 = 1009/9/99 to 9/10/04
DIVERSIFIEDDISTRIBUTIONCLIENT:COMMODITY
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Outlook for Energy Investors’ expectations
realistic again Evolution of business
strategies from rate of return is value added
Challenges: Overcoming irrational
pessimism Rebuilding confidence