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Analyzing NextEra Energy’s Valuation after Its 2Q16 Results

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NextEra Energy: Valuation

NextEra Energy (NEE), worth $60 billion, outperformed peers this year. It has surged more than 22% since the start of the year. The valuations of NextEra Energy, as well as those of almost all other utilities, touched record highs in this period.

NextEra closed 1% lower on the day it reported 2Q16 earnings, despite better-than-expected results. The Utilities Select Sector SPDR ETF (XLU) fell 1.2% on the same day.

As of July 27, 2016, NextEra Energy was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 12x. Its five-year historical EV-to-EBITDA average stands at 10.5x. The industry average is close to 11x.

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The EV-to-EBITDA multiple is a valuation metric used to indicate whether a stock is overvalued or undervalued, regardless of its capital structure. As for peers, Duke Energy (DUK) has an EV-to-EBITDA multiple near 11x, while Southern Company’s (SO) multiple is near 11.8x.

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Forward EV-to-EBITDA

NextEra Energy’s forward EV-to-EBITDA multiple is around 11x. The fact that its forward multiple is lower than its current multiple indicates expectations of higher EBITDA in 2016. Almost all utilities have forward EV-to-EBITDA multiples that are lower than their current multiples. This suggests expectations of better earnings this year.

Price-to-earnings ratios of US utilities surged above 21x, against historical ratios near 16x. NextEra Energy’s price-to-earnings ratio is 21.5x, while Duke Energy’s is 19x.

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