Edison International: Wildfire Risks Mean Stock Potential Is Just Lukewarm
Geoff Considine, Ph.D | Dec 20, 2021 09:08
- Edison International recently raised its dividend and currently yields 4.2%
- The shares have rallied over the past 3 months
- The potential liabilities from wildfires are large and hard to estimate
- The Wall Street consensus is bullish, albeit with very limited upside
- The market-implied outlook (calculated from options prices) is neutral for 2022
Edison International (NYSE:EIX) owns Southern California Edison (SCE), a major utility which supplies power to 15 million Californians over a 50,000 square mile service area. EIX also owns Edison Energy, a global advisory and services firm. SCE faces major uncertainty and ongoing risks associated with liability for wildfires and recently agreed to pay low P/E ratio as compared to DUK, SO and the industry as a whole, this does not mean the shares are undervalued. The substantial idiosyncratic risks faced by EIX certainly justify some discount.
The expected volatility calculated from the market-implied outlook for EIX is 30% higher than for two other major utilities with comparable yields, SO and ED. This is consistent with the market assigning elevated risk for EIX.
The Wall Street analyst consensus outlook for EIX is bullish, and the 12-month consensus price target implies a total return of 8.95%. As a rule of thumb for a buy rating, I want to see an expected 12-month return that is at least half the expected annualized volatility (26.6%). EIX does not meet this criterion. The market-implied outlook for the next 13 months is neutral.
While EIX appears to be moving in the right direction, dealing with the company’s liabilities from 2017-2018 fires and improving operations to reduce future risk, the potential returns on EIX are not attractive relative to the risks. I am assigning a neutral rating for EIX.
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