How the Top Utility Performers of 2017 Are Currently Valued
Only CenterPoint Energy (CNP) stock seems to be trading relatively cheaper than broader utilities (XLU). In fact, its relatively attractive valuation early this year could be one of the main reasons behind CNP’s rally. The stock currently trades at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 9.5x, with a five-year historical average multiple of ~10x. Utilities have an average valuation multiple of 11x.
By comparison, renewables giant NextEra Energy (NEE) stock is now trading at a valuation multiple of 13x—significantly higher than its five-year historical valuation average of 12x.
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Remember, the EV-to-EBITDA ratio implies whether a stock is overvalued or undervalued, regardless of the company’s capital structure. EV refers to the sum of a company’s debt and market capitalization, minus its cash holdings.
NRG Energy (NRG) is trading at an EV-to-EBITDA valuation of 12x, compared with its five-year historical average valuation of 11x. Elliott Management stated that NRG was “deeply undervalued” earlier this year when it disclosed its stake in the largest merchant power player. NRG stock has more than doubled since then.
Xcel Energy and NiSource
Nearly all the S&P 500 utility stocks are now trading well above their respective historical valuation averages. Utilities used to trade at an EV-to-EBITDA valuation multiple of 8x–9x—significantly lower than their current valuation multiple average.
You can read about top utilities’ valuations in Market Realist’s series XLU: Discussing Utilities’ Concerning Valuation.