Spectra Energy: Market is cautious about its valuation



Comparable company analysis

In this part of our series, we’ll discuss Spectra Energy’s (SE) valuation compared to those of its peers. As you can see in the chart below, Kinder Morgan (KMI) is the largest company by market capitalization and enterprise value, or EV. And, AGL Resources (GAS) is the smallest.

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Williams Companies (WMB) has the highest EV/EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple, 29.3x, out of the companies listed. AGL Resources (GAS) has the lowest EV in the group—approximately the summation of its equity value and net debt—when scaled by EBITDA.

A lower forward multiple compared to the present ratio typically indicates expectations of EBITDA growth for the period. Forward EV/EBITDA is a useful metric to gauge relative valuation.

Analysts’ 2015 consensus forward EV/EBITDA multiple for GAS is 9.3x, the lowest of the group. Meanwhile, Spectra Energy’s (SE) projected EV/EBITDA multiple is 12.9x, marginally lower than the group average.

Spectra Energy is a component of the Energy Select Sector SPDR (XLE).

Debt levels

Spectra Energy’s net debt-to-EBITDA multiple of 4.7x is in line with the group and similar to Kinder Morgan’s (KMI). A higher multiple could indicate a potential liquidity crunch, or insufficient cash to repay debt, which would be particularly concerning now that crude oil prices are falling.

Spectra Energy’s debt-to-equity multiple is ~1.2x, higher than most of its peer group. All of the companies in the group have similar debt-to-equity ratios. Higher debt-to-equity ratios indicate increased risk associated with the management of debt levels.

Price-to-earnings ratio

Spectra Energy’s (SE) last-12-month price-to-earnings ratio, or PE multiple, is 22.3x, lower than those of industry giants KMI and WMB.

For the next four quarters, Spectra Energy’s forward PE is 27.9x, which is higher than its current PE multiple, indicating that earnings are expected to drop during that time frame. This reflects a cautious market outlook on the stock’s valuation. Kinder Morgan’s (KMI) next-four-quarters forward PE is 47x, the highest of the group.

Forward PE considers the sell-side analysts’ consensus estimate of earnings for the year. Spectra Energy’s (SE) estimated EPS (earnings per share) growth rate is ~8.3%. In comparison, KMI’s is 19.4%, WMB’s is 14.5%, and TransCanada Corporation’s (TRP) estimated EPS growth rate is 9.8%.


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