SPX Utilities Look Fairly Valued despite Their Epic Rally
California utilities, except Sempra Energy (SRE), appear to be trading at a notable discount compared to their peers. Currently, Sempra Energy is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation ratio of 13.3x. Its five-year historical average lies near 13x. At the same time, utilities on average have a valuation multiple of 11x.
Compared to the industry average, PG&E (PCG) seems to be trading at a fair discount. Its valuation multiple is at 9x. Its five-year historical average valuation multiple is also near 9x. Edison International (EIX) appears to be trading at a discount compared to its peers. It has its valuation multiple near 9.5x. Edison International’s five-year average is below 8x. It should be noted that Edison International and PG&E stocks have largely tracked broader utilities in the past year. The stocks seem to be trading at a fair valuation.
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Very few utilities from the S&P 500 Utilities Index (XLU) are trading at a fair valuation. Duke Energy (DUK) and NextEra Energy (NEE) are both top utilities by market capitalization. They’re trading at an EV-to-EBITDA valuation of 13x and 12x, respectively—well above their historical averages.
Historically, US utility stocks traded near an EV-to-EBITDA valuation multiple of 8x–9x. Currently, they’re trading at ~11x.
US utilities’ PE (price-to-earnings) multiples have increased significantly in the last few quarters. Historically, they traded near a PE multiple of 14x–15x. Currently, they’re trading above 17x–18x. Sempra Energy has a PE ratio of 17.5x. Edison International and PG&E have PE multiples near 19x.
US utilities continue to look strong despite their towering valuations. Is it the right time to enter utilities? Read US Utilities: How Are They Positioned for the Future? for the sector outlook and analysts’ recommendations.