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Southern Company: Analyzing Recent Changes in Key Indicators

PART:
1 2 3 4 5
Part 3
Southern Company: Analyzing Recent Changes in Key Indicators PART 3 OF 5

Comparing Southern Company’s Valuation to Its Peers

Southern Company’s valuation

Currently, Southern Company (SO) is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 12.0x. Its five-year historical average valuation multiple is near 11.0x, while the industry average is just over 10.0x. Southern Company seems to be trading at a premium compared to its historical average and the industry average.

The EV-to-EBITDA ratio gives a comparative idea of a company’s valuation, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt, minus its cash holdings.

Comparing Southern Company’s Valuation to Its Peers

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Peers’ valuations

Duke Energy’s (DUK) EV-to-EBITDA ratio is 10.2x, while Dominion Resources’ (D) ratio is 15.0x. NextEra Energy (NEE) is trading at 12.0x. Among the top US utilities, Duke Energy seems to be trading at a fair valuation compared to its peers.

PE multiple

US utilities (XLU) appear to be trading at a premium considering their PE (price-to-earnings) multiple. Historically, they traded near a PE multiple of 15x–16x. Currently, they’re trading near 20x. Southern Company’s PE multiple is near 19x, while NextEra Energy (NEE) and Dominion Resources (D) have current PE multiples beyond 20x.

Many US utilities are relatively cheaper compared to their towering valuations last year. Their stock price correction could be one of the main reasons behind the fair valuation.

In the next part, we’ll analyze Southern Company’s dividend profile.

Read What’s Ahead for Utilities as Fed Raises Rates for Third Time? to learn how utilities (XLU) reacted after the Fed hiked interest rates.

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