Exelon Has Room For ROE Expansion, According To Morgan Stanley

Upgrade Justification

In a research report on Friday, Byrd upgraded shares of the utility services holding company to Overweight from Equal Weight with an unchanged $37 price target. The analyst highlighted the fact that the company has underperformed its peers over the past few months due to concerns over declining gas and power prices, concerns over its recently acquired Pepco utilities and the lower likelihood of federal carbon regulations following the US presidential election.

Nevertheless, Byrd believes that the stock's decline from its 52-week high of $37.70 is overblown in relation to the slight fundamental decline in gas and power prices.

The ExGen Factor

In addition, Exelon's merchant business, ExGen, appears to be cheaper than pure-play independent power producers despite having investment-grade credit metrics and a highly profitable generation and marketing platform.

Byrd also added that Exelon has clarified several of its regulatory proceedings at Pepco, which makes the analyst more convinced the company can execute on its growth plans and can work productively with regulators to meet its targeted 9 percent ROE by 2019.

Key EPS Catalysts

Finally, the analyst highlighted several drivers that could result in $1 share of earnings per share improvements over the next year, including:

1. Legislative support for Illinois nuclear power plants.
2. Lower corporate taxes under a federal tax reform.
3. Higher commodities prices.
4. Improving allowed returns at its largest utility ComEd.

Bottom line, the analyst believes the factors that could drive upside in Exelon's earnings per share should position the company to outperform its regulated utility peers.