Take a Look at FirstEnergy’s Current Valuation
FirstEnergy (FE) stock has significantly underperformed broader utilities in the last year. FE’s returns, including dividends, in the last year came in at -7% while the Utilities Select Sector SPDR ETF (XLU), which represents the S&P 500 Utilities Index, returned 9% in the same period.
FirstEnergy’s volatile market performance was largely influenced by its volatile earnings. Its large exposure to competitive operations makes its earnings relatively unstable. FirstEnergy management aims to become a pure-play regulated utility by next year to stabilize its consolidated earnings. This transition might stabilize FirstEnergy’s earnings to a certain extent.
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On September 27, FirstEnergy stock was trading at an EV-to-EBITDA valuation multiple of 8.5x. Its five-year historical EV-to-EBITDA average ratio is around 10x. Utilities, on average, are trading at a valuation multiple of 11x. So FirstEnergy seems to be trading at a striking discount to its peers’ average and historical average as well.
The largest competitive utility in the country, Exelon (EXC), is presently trading near 8x. Its five-year EV-to-EBITDA average also comes in around the same levels. So Exelon stock appears to be trading at a reasonable valuation compared to its historical average and at a fair discount compared to the industry average.
Industry giants Dominion Energy (D) and NextEra Energy (NEE) are trading at valuation ratios of 15x and 13x. Both appear to be trading at a significant premium to their historical averages.
Competitive utilities, in particular, appear to be trading at a significant discount compared to peers’ valuation. However, investors seem concerned about associated risks due to their less stable earnings and volatile market performance.