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In Focus: California Utilities’ Valuations after 2Q16 Reports

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Aug. 8 2016, Updated 8:06 a.m. ET

Sempra Energy’s valuation

Sempra Energy (SRE) is trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 14.5x on August 4, 2016. The EV-to-EBITDA multiple is a valuation metric that indicates whether a stock is overvalued or undervalued, regardless of its capital structure.

SRE’s five-year historical EV-to-EBITDA average stands at 11.2x. This shows that it’s trading at a premium to its own five-year historical EV-to-EBITDA valuation. SRE’s EV-to-EBITDA multiple for 2016, using estimated EBITDA for 2016, stands at 11x. This indicates expectations of higher EBITDA in 2016.

The utilities sector’s average EV-to-EBITDA multiple is 11.7x. As for Sempra’s peers, PG&E Corporation’s (PCG) multiple is 10x, and Edison International’s (EIX) multiple stands at 11x on August 4, 2016.

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PE multiple

Historically, US utilities have generally traded around a PE (price-to-earnings) multiple of 15x–17x. Sempra Energy is currently trading at a trailing 12-month price-to-earnings ratio of 23x while PG&E is trading at a multiple of 22x.

Sempra Energy has rallied more than 32% so far this year. As for its peers, Edison International surged by nearly 30% while PG&E has gained nearly 23% in the same period. The steep rally of utilities resulted in record high valuations, which may bring possible profit booking in the near future. On the other hand, favorable developments on the interest rates front may support their rally longer.

We just saw which Californian utilities rallied more so far in 2016. Let’s see whose rally resulted in more total returns in the last year.

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