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How Did Edison Outperform California Peers in the Last Year?

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May. 2 2016, Updated 9:07 a.m. ET

Edison International’s market performance

Utilities recently experienced a minor correction in mid-April due to the broader market’s influence. But still, utilities are one of the top performing sectors due to their rally in the first quarter of 2016. Edison International (EIX) has risen nearly 15% in 2016 so far. An attractive valuation at the start of this year and favorable developments on the interest rate front fueled the rally. Utilities rose 11% in the same period.

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Edison International’s peer Pacific Gas & Electric (PCG) managed to rise more than 7%. Sempra Energy (SRE) has risen ~10% since the beginning of the year. The graph below shows a comparative stock price movement for California utilities. The smallest of the three, Edison International, outperformed its peers in the last one year.

Valuation

As of April 27, 2016, Edison International is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 8x. The EV-to-EBITDA multiple is a valuation metric used to indicate whether a stock is overvalued or undervalued, regardless of capital structure. Edison International’s five-year average EV-to-EBITDA multiple is 7.1x. The industry average (XLU) is around 10.4x.

By comparison, Sempra Energy (SRE) is trading at a multiple of 12.7x, and Pacific Gas & Electric (PCG) is trading at 8.8x. Pinnacle West Capital (PNW) has a ratio of 8.3x.

Edison International’s forward EV-to-EBITDA multiple is around 7.7x. The fact that its forward multiple is lower than its current multiple indicates expectations of higher EBITDA in 2016. Almost all the utilities have lower forward EV-to-EBITDA multiples than their current multiples. This suggests expectations of better earnings this year.

In the final part of our series, we’ll see what’s in it for Edison International investors in the long term.

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