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Why Southern Company trades at a lower valuation to its peers

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Dec. 4 2020, Updated 10:53 a.m. ET

Large cap power company

Southern Company (SO) is a large-cap power company. It had a market capitalization of $43.2 billion as of February 11, 2015. In terms of valuation multiples, let’s see how it stacks up to its competitors in the power industry.

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EV/EBITDA multiple

Southern Company has an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.8x. EV is the total of a company’s equity value and net debt. PG&E Corporation (PCG) trades at the lowest EV/EBITDA multiple.

For Southern Company, both current and analysts’ consensus forward EV/EBITDA in fiscal 2015 is near the average for the group. You can see this in the above chart.

Currently, Duke Energy (DUK), Dominion Resources (D), and NextEra Energy (NEE) trade at a higher forward EV/EBITDA multiple than Southern Company. These companies are the top four holdings of the Utilities Select Sector SPDR (XLU). Together, they account for nearly 33% of XLU’s total holdings.

Forward EV/EBITDA is another way to interpret relative valuation. When compared with its current EV/EBITDA, a lower forward multiple typically indicates growth expectations for EBITDA in the coming quarters.

Slow growth prospects dent valuation

Southern Company has been conservative in terms of expansion and acquisitions. This resulted in slower earnings growth. In contrast, companies—like Dominion and NextEra—are striving to either acquire businesses or venture into new territories.

Recently, Dominion entered into the LNG (liquefied natural gas) export business. NextEra announced the acquisition of Hawaiian Electric (HE) in December last year. This led to its lower valuation compared to its peers.

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