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How Is NextEra Energy Valued after Its 1Q16 Earnings Release?

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NextEra outperformed peers

After posting healthy 1Q16 earnings on Thursday, April 28, NextEra Energy (NEE) closed the day by losing 0.4%. So far in 2016, NextEra has surged by approximately 10%, largely in line with other utilities. However, NextEra Energy outperformed utility peers as well as broader equities (SPY) in the past year.

How Is NextEra Energy Valued after Its 1Q16 Earnings Release?

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Valuation

As of April 29, 2016, NextEra Energy is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.8x. The EV-to-EBITDA multiple is a valuation metric used to indicate whether a stock is overvalued or undervalued, regardless of capital structure.

NextEra Energy’s five-year average EV-to-EBITDA multiple is 10.4. The industry average is around 10x levels. By comparison, Duke Energy (DUK) is trading at a multiple of 10.2x, while American Electric Power (AEP) is trading at 9.3x. Regulated mid-size utilities like Xcel Energy (XEL) and Consolidated Edison (ED) are trading at a ratio of 10x and 8x, respectively.

Forward EV-to-EBITDA

NextEra Energy’s forward EV-to-EBITDA multiple is around 10x. 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.

A dull 2015 for utilities resulted in their undervaluation, which made them more attractive at the beginning of 2016. As a result, utilities rallied uncharacteristically. But this rally now poses a risk of overvaluation. Could this signal a correction ahead? In any case, strong first quarter earnings and the Fed’s dovish stance may stretch the rally in utilities a little longer.

In the next and final part, we’ll see what analysts are recommending for NextEra now.

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