uploads///

Are Unregulated Utilities Still Undervalued?

By

Updated

Valuation

NextEra Energy (NEE) is currently trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.6x. EV-to-EBITDA ratio tells whether the stock is undervalued or overvalued irrespective of its capital structure. Enterprise value is the combination of a company’s debt and equity minus its cash holdings.

Let’s see where the other utilities are on the scale of the EV-to-EBITDA ratio compared to NextEra. We have considered an EBITDA of the trailing 12 months for this calculation.

Article continues below advertisement

Peer comparison

As of March 14, 2016, FirstEnergy (FE) traded at an EV-to-EBITDA multiple of 7.8x, which is higher than Exelon’s (EXC) multiple of 6.2x. Public Service Enterprise (PEG) trades at a ratio of 7.7x. The recent rally in these utilities resulted in a surge in their valuation this year. Utilities’ average EV-to-EBITDA stands near 8x.

Forward EV-to-EBITDA

Forward EV-to-EBITDA is the ratio that considers current enterprise value and estimates of EBITDA for the next 12 months. NextEra Energy (NEE) currently trades at a forward EV-to-EBITDA of 9.7x. The fall in the ratio indicates expectations of a higher EBITDA in 2016.

Exelon Corporation’s EBITDA is expected to show a slight decline in 2016 considering the forward EV-to-EBITDA multiple. It has forward EV-to-EBITDA ratio near 7x. FirstEnergy has a forward multiple trading at 8.2x.

Utilities (VPU) with heavy unregulated operations are expected to continue to struggle in 2016 too. Weaker power prices in the unregulated domain may impact their earnings. Possible higher interest rates can also dent utilities’ earnings in the near future.

Advertisement

More From Market Realist