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How Changes in Duke Energy's Key Metrics Could Affect Its Stock

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Part 3
How Changes in Duke Energy's Key Metrics Could Affect Its Stock PART 3 OF 6

Duke Energy Stock Seems to Be Trading Cheap Compared to Peers

Valuation

Very few US utilities stocks are currently trading at a fair valuation. Duke Energy (DUK) is one utility stock that is trading at a discounted EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple compared to peers and its historical average as well. Duke’s valuation multiple stands at 10.2x. The industry average valuation stands near 10.5x. Duke’s five-year average EV-to-EBITDA is 11x.

Duke Energy seems fairly valued compared to peers like Southern Company (SO) and NextEra Energy (NEE), both of which are trading at a valuation multiple of 12x. Dominion Resources (D) is trading at a valuation of 15x.

Duke Energy Stock Seems to Be Trading Cheap Compared to Peers

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An EV-to-EBITDA ratio indicates whether a stock is undervalued or overvalued, regardless of its capital structure. EV represents the combination of a company’s debt and market capitalization, minus its cash holdings.

PE multiple

US utilities (XLU) appear to be trading at a marginal premium considering their price-to-earnings (or PE) multiple. Historically, they traded near a PE multiple of 15x–16x, and they are currently at ~18x. In 2016, the PE ratio of utilities was above 20x. Duke Energy and Southern Company are both currently trading at PE multiples near 18x.

Utility stocks (XLU) could turn volatile in the upcoming trading sessions, and the possibility of an interest rate hike during the Fed’s March meeting has risen significantly lately. So we may see utility stocks tumble if the Fed raises rates. Investors could possibly turn to bonds in search of higher yields, essentially making utilities stocks relatively cheap.

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