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Where Does Southern Company Really Stand in the Face of 2H16?

PART:
1 2 3 4 5 6 7 8 9
Part 3
Where Does Southern Company Really Stand in the Face of 2H16? PART 3 OF 9

How Is Southern Company Valued among Peers?

SO’s valuation

After rallying by more than 20% in the past six months, almost all utilities have become expensive. However, due to the volatility in broader markets, investors have chosen to remain in safe-haven utility stocks, making them further overvalued. Let’s see how Southern Company (SO) is valued compared to peers.

On June 28, 2016, Southern Company was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation of 11x. This means that SO is marginally overvalued compared to its five-year-historical EV-to-EBITDA multiple of 10.7x.

How Is Southern Company Valued among Peers?

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SO versus peers

The average EV-to-EBITDA multiple of utilities is currently 11.2x. Duke Energy (DUK) and WEC Energy Group (WEC) are trading at valuation multiples of 10.8x and 13.4x, respectively.

The forward EV-to-EBITDA multiple considers current EV and EBITDA estimates for the next 12 months, and SO’s forward EV-to-EBITDA multiple is 10.3x. As its forward multiple is lower than its current multiple, we can expect that SO’s EBITDA will be higher later in 2016.

PE ratio

SO’s PE (price-to-earnings) ratio is 18x, while the industry average is around 21x. It will be interesting to see how long the rally in utilities lasts. Duke Energy’s and WEC’s PE ratios are 18.9x and 22x, respectively.

Given its market performance during the past six months, SO has rallied by more than 10%. In this same period, Duke and WEC Energy Group have also soared by ~20%. The rally was much steeper in mid-size regulated utilities than in the biggies in the sector due to their appealing valuations.

Let’s have a look at some financial insights of Southern Company in the next part.

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