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How Are Utilities Stocks Valued after the Recent Correction?

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Xcel Energy: Valuation

On August 26, 2016, Xcel Energy (XEL) was trading at an EV-to-EBITDA (Enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.2x. Xcel Energy’s average five-year EV-to-EBITDA multiple is 10x. The industry average is around 11x.

Though Xcel Energy is trading at a fair valuation compared to its historical average, it’s still at a premium compared to the industry average.

Eversource Energy (ES) and WEC Energy (WEC) are trading at valuation multiples of 11.5x and 12x, respectively. DTE Energy (DTE) has a multiple 11.8x.

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

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Forward EV-to-EBITDA

Forward EV-to-EBITDA is a multiple that considers a company’s current EV and EBITDA estimates for the next 12 months. The forward EV-to-EBITDA multiple for Xcel Energy is 11x. This reflects expectations of lower EBITDA from Xcel later in 2016.

Xcel Energy is currently trading at a price-to-earnings (or PE) ratio of 20x. Historically, utilities traded in the 16x–17x range. WEC Energy and DTE Energy are trading at PE ratios of 22x and 19x, respectively.

Utilities’ stock corrections may make them relatively better valued. Utilities have risen by ~25%–30% in the last six to seven months. However, a recent correction of 8%-10% is likely to extend into the near term given the Federal Reserve’s hawkish stance over an interest rate hike.

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