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Analyzing Southern Company before Its 1Q17 Earnings

PART:
1 2 3 4 5 6
Part 4
Analyzing Southern Company before Its 1Q17 Earnings PART 4 OF 6

Southern Company’s Valuation Compared to Its Peers

Market performance

At $50 billion, Southern Company (SO) has been relatively weak on Wall Street. Currently, Southern Company stock is trading near its levels last year. So far in 2017, Southern Company stock has gained 2%, while the Utilities Select Sector SPDR ETF (XLU) has risen 7% during the same period. The SPDR S&P 500 ETF (SPY) (SPX-INDEX) has risen 5% during the same period. Southern Company makes up more than 7.5% of XLU. Notably, the utility sector makes up nearly 3.2% of SPY.

The following chart compares the performances of Southern Company, XLU, and SPY over the past year.

Southern Company&#8217;s Valuation Compared to Its Peers

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Valuation

Southern Company appears to be trading at a premium to its historical average and the industry average. Currently, it’s trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 12.2x. Southern Company’s five-year historical average valuation multiple is near 11.0x, while the industry average is near 10.0x.

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.

In comparison, Duke Energy’s (DUK) EV-to-EBITDA ratio is 10.0x, while Dominion Resources’ (D) ratio is 15.0x. NextEra Energy (NEE) is trading at 12.2x.

Among the top US utilities, Duke Energy seems to be trading at a fairer valuation compared to its peers.

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