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Chart of the Day: California Wildfires and PG&E's Stock Price Performance

Readers Note

The team behind Milton sends its support to all those affected by the California wildfires. You can donate here to support the American Red Cross.

Introduction

The stock of California's largest utility company, Pacific Gas & Electric Company, or PG&E (ticker: PCG), has had a difficult 2018, with shares down nearly -46% year-to-date during 2018. For those of you less familiar with PG&E, the company provides natural gas and electricity to the northern two-thirds of California, or 5.2 million households (4% of all US households). Below is a 1-year stock price chart for PCG taken from Milton's new Smart Watchlist on November 17, 2018.

PG&E's Stock Price Over Past 1 Year (from Milton's Smart Watchlist)

Why is PG&E in the news?

PG&E has been in the news a lot during 2018. Earlier this year, investigations from California Fire blamed the company for at least 6 wildfires during 2017, and PG&E is facing billions of dollars of potential liabilities related to these 2017 wildfires. But even more distressing, recent news suggests PG&E may be responsible for the Camp Fire in Northern California, the deadliest and most destructive wildfire in California history. With billions of dollars of potential wildfire-related liabilities in 2017 and potentially substantially more liabilities in 2018 related to the Camp Fire in Northern California, the company's share price has tumbled -46% year-to-date!

This -46% year-to-date drop is despite a +38% rally in the stock price during Friday's trading session (November 16, 2018), after California's energy regulator suggested the state would rescue PG&E from wildfire-related liabilities that threaten to plunge the company into bankruptcy.

What does Milton think?

Milton has been Negative on PG&E for quite a while. In fact, below is a screenshot of Milton's View of PG&E as of November 17, 2018. You can access this view by setting up your Milton Smart Watchlist on Milton and adding ticker "PCG" to your watchlist. As seen below, Milton's Score is 32 (0-35 is classified as Negative per Milton's scoring system) and only a month ago, Milton's Score for PG&E was 1 (one), the absolute lowest Milton can score a stock on a 0-100 scoring system.

For context, PG&E's share price one month ago was $48.79 on October 16, 2018, versus $24.40 one-month later as of Friday's close on November 16, 2018, or down nearly 50% over the past 1 month! In fact, Milton highlighted PG&E as a short idea during its weekly #MiltonMondays update in our newsletter a few weeks ago, prior to the Camp Fire in Northern California.

Milton's Score for PG&E Over Next 1 Year (from Milton's Watchlist)

Why is Milton Negative on PG&E?

As we've alluded to in the past on Milton's Blog, it is challenging to truly understand why Milton's comes to a decision. Simply put, interpreting how sophisticated AI technologies think is a challenge.

However, we consistently evaluate Milton's Views and look to data that Milton analyzes as a starting point. Based on our analysis, we identified three key reasons.

(1) PG&E consistently had negative earnings revisions over the past one year. In the table below, we present how 2018 Wall Street consensus estimates for Revenue and EBITDA declined consistently every 3 months. In absolute terms, 2018 Revenue forecasts declined by -5% year-over-year from November 2017 to November 2018 while 2018 EBITDA forecasts declined by -11% during that same 12 month time period. If we were to map the same data for 2019 Wall Street estimates for Revenue and EBITDA, you'd see a similar pattern.

2018 Wall Street Estimates (Revenue & EBITDA) Over Past 12 Months

(2) PG&E's decision to suspend its quarterly dividend in December 2017 made the stock substantially less attractive versus utilities peers as it paid its last quarterly dividend in February 2018. For context, PG&E's dividend yield at the end of 2017 was nearly 4.6% versus 0% today, since the company's Board of Directors decided to cease dividend payments in light of potential liabilities related to the 2017 wildfires.

(3) Concerns about PG&E's wildfire related liabilities in 2017 grew as measured by what Milton "reads" every day throughout 2018. While the Camp Fire started on November 8, 2018, using our database of millions of financial news articles, we are able to measure how concerns about PG&E's 2017 wildfire-related liabilities trended throughout 2018. In the chart below, we map this data going back to January 2018 and index that month's news activity to 1.0 (one) in the chart below. As you can see, Milton read a lot of content highlighting concerns about future liabilities related to the 2017 wildfires well before the Camp Fire began in November 2018. In fact, from the time period from June 2018 to August 2018, Milton saw a significant spike in financial news related to PG&E's potential future liabilities related to the 2017 wildfires. It is important to note that PG&E stock hit a 2018 high in late October 2018 before dropping nearly 50% month-to-date in November as the Camp Fire tragedy unfolded. However, the chart below shows that PG&E's future wildfire related liabilities were top-of-mind in the financial news throughout 2018.

Moreover, the sentiment of many of these articles was quite negative. We have provided an example of a more recent news article where we list Milton's Sentiment Score, measured using our proprietary natural language processing capabilities. Doing a cursory review of the content measured above suggests much of the financial press had negative sentiment like the sample article below.

Sentiment Score From Milton Watchlist (ticker: PCG)

Conclusion

Obviously, Milton could not have foreseen the Camp Fire in Northern California. However, the overhang of PG&E's 2017 wildfire-related liabilities, as well as consistent negative earnings revisions and a dividend cut, suggest Milton's Negative View on PG&E seemed reasonable prior to the November 2018 Camp Fire.

Contact Us

Remember to build your Milton Smart Watchlist here. It's totally free and takes less than one minute.

Please reach out to milton@apteo.co or myself at manan@apteo.co with any feedback, questions, or for information about becoming a beta tester.


About Apteo
Apteo, the company behind Milton, is made up of curious data scientists, engineers, and financial analysts based in the Flatiron neighborhood in New York City.  We have a passion for technology and investing, and we strongly believe that investing is one of the most reliable and effective ways to build long-term wealth.  We build AI tools to help informed investors make better decisions.  

To learn more about us, please reach out to us at info@apteo.co, join our mailing list at milton.ai, or subscribe to Milton’s blog at blog.milton.ai.


Disclaimer
Apteo, Inc. is not an investment advisor and makes no representation or recommendation regarding investment in any fund or investment vehicle.

Chart of the Day: California Wildfires and PG&E's Stock Price Performance
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