Where do First Energy’s valuation multiples stand against its peers?



First Energy’s peers

First Energy Corporation (FE) is as a diversified power utility. Its business includes both regulated operations and competitive power generation. While regulated operations are government controlled and yield nominal returns, the competitive segment has low government interference, and returns are based on market dynamics.

Exelon Corporation (EXC), American Electric Power Company (AEP), and Public Service Enterprise Group (PEG) are some of the companies that have business models similar to First Energy’s.

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First Energy’s valuation

For the current year, First Energy is trading at a higher enterprise value to earnings before interest, tax, depreciation, and amortization (or EV/EBITDA) than to its peers. It trades at an EV/EBITDA of 9.4x for full year EBITDA of 2014.

However, the multiples decline to 8.4x and 8.1x for fiscal years 2015 and 2016. The drop in forward EV/EBITDA multiples for First Energy is much steeper than its peers. This shows investors still have doubts that First Energy can realize analysts’ estimates for EBITDA levels for the next two years and haven’t priced it. Forward EV/EBITDA multiples take into consideration the consensus EBITDA estimates

As noted in the chart above, AEP trades at a higher EV/EBITDA for fiscal years 2015 and 2016. On the other hand, Public Service Enterprise Group trades at a significantly lower EV/EBITDA multiple compared to the other companies.

Investors looking to invest in a basket of power utilities companies can invest in the Standard & Poors depositary receipt (or SPDR) Utilities Select Sector (XLU), a key exchange-traded fund (or ETF) in the power utilities industry that has exposure to 30 power companies operating in the United States.


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