Is PG&E a Worthwhile Investment?

With shares of PG&E (NYSE:PCG) trading around $41, is PCG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

PG&E is a holding company that conducts its business through Pacific Gas and Electric Co. The utility’s revenues are generated mainly through the sale and delivery of electricity and natural gas to customers. The company served approximately 5.2 million electricity distribution customers and 4.4 million natural gas distribution customers as of December 31. PG&E’s rates for electricity and natural gas utility services are based on its costs of providing service. It is regulated primarily by the California Public Utilities Commission (CPUC) and the Federal Energy Regulatory Commission (FERC). In addition, the Nuclear Regulatory Commission oversees the licensing, construction, operation, and decommissioning of the utility’s nuclear generation facilities.

PG&E has agreed to settle with plaintiffs in lawsuits related to the 2010 San Bruno pipeline explosion that killed eight people. The company has already agreed to pay $455 million in settlements reached Friday and is expected to pay another $110 million by the end of the month, the utility company said Monday according to Bloomberg. The company will also face a fine from the California Public Utilities Commission for the safety violations that led to the blast. Some from the commission have suggested a $2.25 billion penalty.

T = Technicals on the Stock Chart Are Strong

PG&E stock has struggled to make significant progress this year. The stock is currently trading near lows for the year, so it may need some time to recover. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, PG&E is trading above its rising key averages, which signal neutral to bullish price action in the near term.

PCG

Source: Thinkorswim

Taking a look at the implied volatility and implied volatility skew levels of PG&E options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

PG&E Options

22.96%

36%

34%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Steep

Average

November Options

Steep

Average

As of Tuesday, there is average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

E = Earnings Are Increasing Quarter Over Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on PG&E’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for PG&E look like and, more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

34.55%

-1.79%

-114.85%

68.00%

Revenue Growth (Y-O-Y)

5.09%

0.85%

0.39%

3.01%

Earnings Reaction

-0.88%

-0.90%

-3.96%

1.23%

PG&E has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have been disappointed with PG&E’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has PG&E stock done relative to its peers – Edison International (NYSE:EIX), Portland General Electric (NYSE:POR), and Hawaiian Electric (NYSE:HE) — and sector?

PG&E

Edison International

Portland General Electric

Hawaiian Electric

Sector

Year-to-Date Return

2.29%

1.04%

2.85%

-1.43%

1.39%

PG&E has been a relative performance leader, year to date.

Conclusion

PG&E is a gas and electric company that strives to provide excellent utility service to consumers and companies. The company has agreed a settlement for a recent lawsuit. Its stock has struggled in recent years and is now trading near lows for the year. Over the last four quarters, earnings and revenues have been mixed, which has disappointed investors in the company. Relative to its peers and sector, PG&E has been a year-to-date performance leader. WAIT AND SEE what PG&E does this coming quarter.

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