NiSource (NI) was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 11.2x as of September 6, 2016. The EV-to-EBITDA multiple is a valuation metric that indicates whether a stock is overvalued or undervalued, regardless of capital structure.
NiSource’s five-year historical EV-to-EBITDA average stands at 11x. This shows that, roughly, it’s trading at a fair valuation compared with its historical average. Moreover, the industry average is near 11x, which highlights NI’s fairer valuation.
As for peers, DTE Energy’s (DTE) EV-to-EBITDA multiple is 11.7x. Eversource Energy’s (ES) multiple is 11.3x. The company’s estimated forward EV-to-EBITDA stands at 9.8x. This indicates expectations of higher EBITDA later in 2016.
Historically, US utilities have traded at price-to-earnings multiples of 15x–17x. Currently, they are still above the 20x mark and are trading at a fair premium to their historical averages. NiSource is trading at a price-to-earnings multiple of 25x, while Xcel Energy (XEL) and Eversource Energy are trading at a multiple of 19.8x.
NiSource stock has fallen nearly 11% from its recent peak. Almost all the utility stocks have corrected 10%–12% after an impressive rally this year. The recent correction has brought them to relatively fair valuations, which may renew investors’ interest in utilities in the short term. Interestingly, August employment data may deter the Fed from raising interest rates this month. This is likely to fuel utilities’ rally further, ultimately making them overvalued again.