PG&E Corporation (PCG) is a San Francisco-based holding company that operates primarily through its subsidiary, Pacific Gas and Electric Company, which is one of the largest combined natural gas and electric energy companies in the United States. On July 21, the company announced a new initiative to expand the “undergrounding” of electric distribution power lines in high fire threat districts (HFTD) to harden its system further and help prevent wildfires.

However, the stock has lost 23.7% over the past six months and 14.1% over the past month to close yesterday’s trading session at $8.95. 

PCG’s operating expenses for the second quarter (ended June 30, 2021) increased 7.8% year-over-year to $4.58 billion, driven by costs related to the amortization of wildfire insurance fund contributions, the investigation of remedies, reorganization under Chapter 11, and wildfire-related expenses. It also witnessed a decline in interest from the hedge funds. So, the stock’s prospects look bleak in the near term.

Here’s what we think could shape PCG’s performance in the near term:

Investigations on Ongoing Dixie Fire

One of California’s largest wildfires, the Dixie Fire, which began  on July 13, 2021, has burned through nearly 221,000 acres in Northern California and has yet to be brought under complete control. It is alleged that PCG’s equipment may have been involved in sparking the Dixie Fire, which  has forced evacuations in Butte and Plumas counties. Although investigations into the fire’s cause are in preliminary stages, the company is expected to incur losses in connection with the fire. PCG equipment was also found to be at fault in several other recent California wildfires, including the 2018 CampFire that devastated the town of Paradise and killed 85 people.

Questionable Practices

PCG recently disagreed with a Northern California prosecutor who said that criminal charges would be filed in last year’s Zogg Fire. However, the company continues to settle with individual victims and their families impacted by the Zogg fire. In addition, PCG accepted The California Department of Forestry and Fire Protection’s (CAL FIRE) finding in April 2021 that a PCG transmission line caused the 2019 Kincade fire.

California officials voted on April 16, 2021, to toughen oversight of Pacific Gas & Electric, saying that the utility had  failed to perform required tree-trimming work near power lines in areas with the highest risk of wildfires. Also, the company proposed a rate increase from 2023 to use some of the funds to prevent wildfires. However, the watchdog group The Utility Reform Network (TURN) was critical of the proposal, saying that the “increase is a slap in the face to millions of California residents still hurting economically from the pandemic.”

Poor Profitability

In terms of trailing-12-month gross profit margin, PCG’s 30.46% is 29.1% lower than the 42.94% industry average. The company’s 6.38% and 0.80% respective  trailing-12-month ROCE and ROTA are lower than the 9.87% and 2.54% industry averages. Its 4.09% trailing-12-month net income margin is also significantly lower than the 11.11% industry average.

POWR Ratings Reflect Bleak Prospects

PCG has an overall D rating which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. PCG has a D grade for Momentum, consistent with its 20.9% loss over the past three months and 14.1% loss over the past month.

The stock has an F grade for Sentiment. This is justified because  analysts expect PCG’s EPS to decline 37.9% year-over-year to $1 in the current year. It has an F grade for Quality also. Which is  in sync with its lower-than-industry profitability ratios.

PCG is ranked #52 of 57 stocks in the F-rated Utilities – Domestic industry. Click here to access the additional POWR ratings for PCG (Growth, Value, and Stability).

Bottom Line

Even though PCG is a prominent player in the electric utilities space, it has been named in several controversies over the past few years related to wildfires. Consequently, it’s stock has  declined 78.9% over the past three years and 86.1% over the past five years. It continues to be involved in several allegations. In addition, analysts expect PCG’s EPS to decline in the current year. So, we think the stock is better avoided now.

PCG shares rose $0.06 (+0.67%) in premarket trading Tuesday. Year-to-date, PCG has declined -28.17%, versus a 17.81% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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