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XEL, SO, WEC: Analyzing Towering Valuations of Utilities

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Xcel Energy: Valuation

On July 26, 2016, Xcel Energy (XEL) was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.6x. Xcel Energy’s average five-year EV-to-EBITDA multiple is 10x. The industry average is around 11.8x.

Due to the relentless rally in the last six months, valuations of utilities touched record highs. Interestingly, overvalued utilities are still not looking significantly weak due to the anxiety in the broader markets.

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The EV-to-EBITDA ratio indicates whether the stock is undervalued or overvalued, irrespective of its capital structure. EV is the combination of a company’s debt and market capitalization minus its cash holdings.

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Peer comparison

In comparison, WEC Energy Group (WEC) is trading at an EV-to-EBITDA multiple of 13.5x, while Southern Company (SO) is trading at a multiple of 11.2x. Xcel Energy’s forward EV-to-EBITDA multiple is around 11x. The marginally higher forward multiple compared to the current multiple indicates expectations of lower EBITDA for Xcel Energy in 2016.

Xcel Energy is trading at a price-to-earnings ratio (or PE) of 21x. Southern Company is currently trading at a PE ratio of 18.5x. Duke Energy is trading at a PE ratio of 19.1x.

Investors are continually favoring utilities despite their towering valuations due to their attractive risk-reward proposition. However, factors like unfavorable interest rate developments or poor second quarter results can push utilities off the cliff.

In the next part of this series, we’ll see how Xcel Energy is performing in comparison to its moving averages.

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