SO, NEE, and DUK: Analyzing Current Valuations
Southern Company (SO) is now trading at an EV-to-EBITDA1 valuation multiple of 12.2x. SO’s five-year historical average valuation multiple is near 11.0x, while the industry average is near 10.0x. So, Southern Company appears to be trading at a premium to its historical average as well as to the industry average.
The EV-to-EBITDA ratio gives a comparative idea of a company’s valuation, regardless of the company’s capital structure. EV refers specifically to the combination of a company’s market capitalization and debt, minus its cash holdings.
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In comparison, Duke Energy’s (DUK) EV-to-EBITDA ratio is 10.0x, while Dominion Resources’s (D) ratio is 15.0x. NextEra Energy (NEE) is now trading at 12.2x. Among the top US utilities, Duke Energy seems to be trading at the fairest valuation compared to its peers.
However, SO appears to be trading at a discount considering its PE (price-to-earnings) multiple of 19x. Duke has a PE multiple above 21x and historically, both have traded near a PE multiple of 15x–16x. NextEra Energy and Dominion Resources have current PE multiples above 21x.
US utilities (XLU) are gradually approaching their towering valuation multiples of last year. Very few utilities are currently trading at a fair valuation. Their premium valuations point to the risk of correction in the near future.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩