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Where Does PG&E Corporation Stand from a Valuation Standpoint?

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Dec. 4 2020, Updated 10:52 a.m. ET

Market performance

Pacific Gas & Electric Corporation (PCG) closed with a minimal gain after the announcement of its quarterly earnings yesterday. PG&E Corporation has managed to rise 6% so far this year. Utilities (FXU) rallied when the Fed took a pause in January after raising interest rates in December 2015. Lower interest rates benefit utilities, an asset-heavy industry. Increased interest expenses have hampered utilities’ profitability. The chart below shows the price movement of Californian utilities this year. Sempra Energy (SRE) has risen 4%, while the smallest of the utilities, Edison International (EIX), has risen 8% since the beginning of 2016.

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Valuation

Currently, PCG is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 8.4x. Its average five-year EV-to-EBITDA multiple is at the same level.

PCG’s forward EV-to-EBITDA multiple for fiscal 2016, according to its 2016 EBITDA estimate, comes in at 6.7x. This indicates expectations of higher EBITDA for PCG in 2016. The utility sector’s average EV-to-EBITDA multiple comes in at 10.3x. In comparison, Ameren Corporation (AEE) has an EV-to-EBITDA multiple of 8.5x, while American Electric Power’s (AEP) multiple is 8x.

The EV-to-EBITDA multiple is a valuation metric that indicates whether a stock is overvalued or undervalued, regardless of the company’s capital structure.

Dividend

PCG’s management has long been waiting for the gas transmission and storage rate case to gain approval. Management expects to increase dividends after the approval. Currently, PCG’s dividend yield is at 3.3%. However, the industry average yield is near 4%.

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