How Is Dominion Resources Valued after Its 1Q17 Earnings?
On May 4, 2017, Dominion Resources (D) was trading at an EV-to-EBITDA1 multiple over 15x. Dominion Resources’ five-year historical average stands at 14x. Currently, the industry average is near 10.2x. Dominion appears to be trading at a premium valuation compared to its peers.
An 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.
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NextEra Energy (NEE), the largest utility by market capitalization, is trading at an EV-to-EBITDA multiple of 12.2x. Duke Energy’s (DUK) EV-to-EBITDA was 10x, while Southern Company’s (SO) EV-to-EBITDA was ~12.2x.
US utilities (XLU) have traded at a five-year historical average PE (price-to-earnings multiple) of 15x–16x. On May 4, 2017, the average was above 20x, a fair premium to the historical average. Dominion Resources was trading at a PE of more than 23x. Duke Energy and Southern Company were both trading at PEs near 21x.
It’s been a long time since US utilities traded at premium valuations to their historical averages. The last significant downfall that US utility stocks witnessed was in mid-2016. After the 2016 elections, utilities again started rallying despite increased possibilities of interest rate hikes.
On the flip side, utilities currently look fundamentally strong, and their expected earnings and dividend growth rates could keep them strong going forward.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩