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Utilities Are Trading at a Premium, but for How Long?

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Valuation

Are utilities overpriced or fairly priced? In 2016, the smart rally in midsize regulated utilities has bolstered their valuations. PPL Corporation (PPL), for example, seems to be overpriced when compared to peers based on EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio. EV-to-EBITDA indicates whether a stock is undervalued or overvalued, regardless of its capital structure. (Please note that enterprise value is the combination of a company’s debt and equity, minus its cash holdings.)

Utilities Are Trade at a Premium, but How Long Will They Be Worth It?

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Are utilities overpriced?

By comparison, Xcel Energy (XEL) is currently trading at an EV-to-EBITDA multiple of 10.3x while Edison International’s (EIX) multiple is 8x. Consolidated Edison (ED) has the EV-to-EBITDA ratio at 10x. Utilities, on an average, have multiples near 11x levels.

The steep climb so far this year has indeed resulted in some overpricing among these utilities. All the four midsize utilities in our review are trading at premiums compared to their five-year average historical EV-to-EBITDA valuations.

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. Xcel Energy has a forward multiple trading at 10.3x while Consolidated Edison’s forward EV-to-EBITDA is near 9x levels. All these regulated utilities are trading at lower forward multiples than their current EV-to-EBITDA ratios. This indicates expectations of higher EBITDAs from these utilities (JXI) in 2016.

For more on the valuations of large-cap regulated utilities (XLU), check out “Why Is Dominion Trading at a Higher Valuation Than Its Peers?” But first, let’s continue to the next and final part of this series, wherein we’ll analyze the outlook for midsize utilities.

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