This "look-ahead" post discusses how I came up with an estimate for Edison International's earnings for fiscal year 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before getting into the details, let's take a step back and start with background information about Edison International.
Edison International is the parent of Southern California Edison, which provides electric power to more than 15 million people. Per government mandates, a growing percentage of this power has been derived from renewable sources. Electric utilities in California have been blamed for, and are spending considerable sums to prevent, wildfires caused by their equipment.
Shares of Edison now trade for about $58 each, giving the company a market value of $22 billion. These shares can be found in the Dow Jones Utilities Average, Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.
Edison recorded profits of $356 million on revenue of $13 billion during the last year. In the quarter that ended on September 30, 2020, Edison earned $1.67 per share (excluding certain items), which matched the $1.67 Wall Street consensus forecast. See https://tinyurl.com/y4jdllsu for Edison's most recent quarterly report.
Revenue in the September 2020 quarter totaled $4.6 billion, 24 percent more than last year.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Edison International updated its guidance for the entire fiscal year when it reported third-quarter results in last October.
The columns above with guidance from last September can be ignored because the October guidance superseded any estimates issued earlier. "Non-core Items" are the difference between Basic (i.e., GAAP) and Core (i.e., Non-GAAP) earnings. The $2.74 per share estimate for Non-core Items is almost the same as the actual Non-core amount during the first three quarters of 2020. This suggests that Non-core amount in the fourth quarter will be minimal; in other words, the difference between Basic and Core EPS should be fairly small.
During the first three quarters of 2020, Edison's Core EPS was $0.57. The company's Basic EPS guidance for the fourth quarter is, therefore, $1.73 minus $0.57 = $1.16 to $1.88 minus $0.57 = $1.31.
To estimate Revenue for the December quarter, I looked into Edison's historical financial data and found that roughly 24 percent of the company's annual Revenue gets recorded in the fourth quarter of a typical year. The percentage can vary from year, sometimes significantly, but I consider it a reasonable basis for an estimate. Since Revenue was $10.42 billion during the first three quarters of 2020, my estimate for the fourth quarter is $3.3 billion.
In the December quarters of 2016, 2017, 2018, and 2019, the Gross Margin averaged 37.2 percent of Revenue. I'm assuming the figure will be similar in the fiscal year 2020. The estimated Cost of Goods Sold is (1-0.372)* $3.3 billion = $2.1 billion
Edison's depreciation expense was between $480 and $490 per quarter during the first nine months of 2020. I assumed $485 million for the fourth quarter.
Miscellaneous operating expenses were over $1.3 billion in the third quarter because this period included non-core charges related to previous wildfire and mudslide events. Since the guidance implied that non-core charges would be minimal in the fourth quarter (see above), I used only the token figure of $50 million for this line on the Income Statement.
The numbers above combine to produce an estimate for Operating Income in December quarter of about $690 million, which is more than double the equivalent quantity in the year-earlier quarter.
For the two non-operating items, I used figures from the September quarter..
Edison's effective income tax rate has been both absurdly high and absurdly low during recent quarters. In the first three quarters of the year, the company reported a tax credit of $355 million on pre-tax loss of $36 million. I simply assumed a 10 percent tax rate, which (strangely enough) seems conservative.
After a $45 million deduction for preferred stock dividend payments, my estimate for Edison International's Net Income in the December 2020 quarter works out to be $454 million ($1.20 per share).
The following Income Statement summarizes the estimates made as discussed above.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
#edison #eix #gauges #gcfr #gcfr2 #lookahead #nac_financialanalysis
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