On August 2, 2016, NiSource (NI) was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 11.8x.
NiSource’s average five-year EV-to-EBITDA multiple is 10.7x. The industry average is around 12x.
By comparison, CenterPoint Energy (CNP) is trading at a multiple of 9x, while Pinnacle West Capital (PNW) is trading at a multiple of 9.3x. NiSource’s forward EV-to-EBITDA multiple is around 10.3x. Its forward multiple’s being lower than its current multiple indicates expectations of higher EBITDA for the company in 2016.
The EV-to-EBITDA multiple is a valuation metric used to indicate whether a stock is overvalued or undervalued, regardless of its capital structure.
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.
Correction overdue in utilities?
Utilities’ current valuations are likely to result in some profit-booking in the near future. The rally in utilities in 2016 led utilities’ valuations to surge above their historical highs. Utilities have rallied by more than 25% since the start of 2016. The unusual rally has resulted in record high valuations.
Investors may want to opt to exit utilities, given their massive total returns in the last six months. However, a correction in utilities is long overdue, and investors are likely staying put due to the absence of any other attractive investment options. Quarterly earnings and interest rate developments may pave the way for utilities going forward.