US utilities (IDU) had a dismal performance in 2015 in part due to the fear of higher interest rates. The Federal Open Market Committee (or FOMC) raised its short-term interest rates by 25 basis points on December 16, 2015. It will be interesting to see how utilities perform if the Fed implements a series of interest rate hikes this year. Thus, interest rates will be the most important indicator for utilities in 2016.
Currently, Public Service Enterprise Group (PEG) is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 6.2x. PEG’s historical average EV-to-EBITDA multiple stands near the same level. PEG’s forward EV-to-EBITDA for fiscal year 2015 stands at 6.9x. This indicates expectations of lower EBITDA in 4Q15. PEG’s EV-to-EBITDA multiple is lower than Xcel Energy’s (XEL) 9.7x while the largest American utility, Duke Energy (DUK), has a ratio of 8.6x. EV-to-EBITDA indicates whether the stock is overvalued or undervalued regardless of capital structure.
Wall Street analysts estimate Public Service Enterprise’s one-year price target at $42.1. Currently, it is trading at $38.5 as of January 7, 2016. This is a possible upside of ~7% from the current levels. Of the 20 analysts covering PEG, three recommend it as a “buy” while 15 recommend it as a “hold.” Two analysts are recommending PEG a “sell.”
In comparison, peer Pinnacle West (PNW) has an estimated upside of a mere 2% in the next one year with a price target of $65.3. PNW is currently trading at $64. Large-cap peer Exelon (EXC) has a price target of $33.4 against its current price of $28. This comes to a possible robust upside of 19.5% in the next one-year period.