Is FirstEnergy Stock Fairly Valued?
FirstEnergy (FE) appears to be trading at a fair valuation compared to its peers. Currently, it’s trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of 7.7x, while the industry average is just above 10x. FirstEnergy’s five-year historical EV-to-EBITDA ratio is ~10x.
The EV-to-EBITDA ratio indicates whether the stock is undervalued or overvalued, regardless of its capital structure. Enterprise value is the combination of a company’s debt and equity minus its cash holdings.
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Currently, Exelon (EXC) is trading at an EV-to-EBITDA valuation multiple near 8x. Public Service Enterprise Group (PEG) stands at 10x. These competitive utilities appear to be trading at a fair valuation compared to the sector average.
Notably, many S&P 500 utility giants seem to be trading at a premium. Southern Company (SO) and NextEra Energy (NEE) are trading at valuation ratios of 12x. Currently, utilities’ average PE multiple stands near 20x. Utilities have historically traded at a PE ratio of around 15x. The current PE ratio roughly matches broader equities (SPY). Right now, utilities are expensive and not worthy of a market multiple due to their lower earnings growth.
Read How Are Competitive Utilities Placed Heading into 2017? to investigate which of these competitive utilities (XLU) could be the best investment options for your portfolio.