The Southern Co. :SO-US: Earnings Analysis: Q1, 2017 By the Numbers : May 8, 2017

The Southern Co. reports financial results for the quarter ended March 31, 2017.

We analyze the earnings along side the following peers of The Southern Co. – SCANA Corporation, Dominion Resources, Inc., Entergy Corporation, American Electric Power Company, Inc., NextEra Energy, Inc., FirstEnergy Corp., PPL Corporation, NRG Energy, Inc. and El Paso Electric Company (SCG-US, D-US, ETR-US, AEP-US, NEE-US, FE-US, PPL-US, NRG-US and EE-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 5721 million, Net Earnings of USD 669 million.
  • Gross margins narrowed from 31.48% to 29.49% compared to the same period last year, operating (EBITDA) margins now 38.04% from 41.13%.
  • Year-on-year change in operating cash flow of 3.70% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings rose compared to same period last year, despite decline in operating and pretax margins.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-03-31 2016-12-31 2016-09-30 2016-06-30 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 5721 5181 6264 4459 3965
Revenue Growth (%YOY) 44.29 43.68 15.98 2.81 -5.21
Earnings (mil) 669 233 1141 624 496
Earnings Growth (%YOY) 34.88 -17.67 17.63 -2.95 -5.52
Net Margin (%) 11.69 4.5 18.22 13.99 12.51
EPS 0.66 0.2 1.16 0.65 0.53
Return on Equity (%) 9.72 3.34 18.1 10.65 8.72
Return on Assets (%) 2.44 0.86 4.63 2.94 2.43

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Market Share Versus Profits

Revenues History
Earnings History

SO-US‘s change in revenue this period compared to the same period last year of 44.29% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that SO-US is holding onto its market share. Also, for comparison purposes, revenues changed by 10.42% and earnings by 187.12% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 29.49% to 31.48% for the same period last year, while operating margins (EBITDA margins) went from 38.04% to 41.13% over the same time frame.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

SO-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently -56.09 days, compared to last year’s level of -57.35 days.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

SO-US‘s change in operating cash flow of 3.70% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

Despite a decline in operating (EBIT) margins as well as a decline in pretax margins, the company’s earnings rose.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for The Southern Co.

Company Profile

The Southern Co. operates as a holding company, which engages in he distribution of natural gas through the natural gas distribution utilities. It operates through the following segments: Traditional Electric Operating Companies, Southern Power, Southern Company Gas, and All Other. The Traditional Electric Operating Companies segment refers to vertically integrated utilities that own generation, transmission and distribution facilities, and supplies electric services in the states of Alabama, Georgia, Florida, and Mississippi. The Southern Power segment constructs, acquires, owns, and manages generation assets such as renewable energy projects and sells electricity in the wholesale market. The Southern Company Gas segment distributes natural gas through natural gas distribution facilities in the states of Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee, and Maryland. The All Other segment covers segments below the quantitative threshold. The company was founded on November 9, 1945 and is headquartered in Atlanta, GA.

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