On July 25, 2016, NiSource (NI) was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 11.2x.
NiSource’s average five-year EV-to-EBITDA multiple is 10.7x. The industry average is around 12x.
NiSource’s forward EV-to-EBITDA multiple is around 10.3x. The EV-to-EBITDA multiple is a valuation metric used to indicate whether a stock is overvalued or undervalued, regardless of its capital structure.
NI’s lower forward multiple compared to its current multiple indicates expectations of higher EBITDA for the company in 2016. NiSource is currently trading at a PE (price-to-earnings) ratio of 28x. CenterPoint Energy and Pinnacle West Capital are trading at PE ratios of 22x and 21x, respectively.
What do pricey utilities indicate?
Utilities’ current valuations are likely to head to some profit-booking. The rally in utilities in 2016 led utilities’ valuations to rise above their historical highs.
Investors may want to opt to exit the sector, given utilities’ massive total returns in the last six months. However, a correction in utilities is long overdue, and investors are likely staying put because of the absence of any other relatively attractive investment options. Second-quarter earnings and interest rate developments may pave the way for utilities going forward.
In the next part of this series, we’ll see how NiSource outperformed its peers and broader equities.