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SO, DUK, and AEP: Analyzing Top Utilities’ Current Valuations

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Valuation

Investors may find US utilities relatively cheap compared to where they were a couple of months ago. On November 23, 2016, Southern Company (SO) was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of slightly more than 12x.

Southern Company’s five-year historical EV-to-EBITDA average stands at nearly the same level. This indicates that Southern is valued fairly compared to its own historical average.

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The EV-to-EBITDA ratio gives a comparative idea of the valuation of a company, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt minus its cash holdings. The chart above shows the current valuation multiples of utilities companies along with their historical averages.

Peer comparison

Duke Energy’s (DUK) EV-to-EBITDA multiple is 10.4x, while American Electric Power’s (AEP) multiple is near 10x. Exelon (EXC) is trading at a multiple of 8.2x.

Utilities have largely traded near an average PE (price-to-earnings) multiple of 15x in the last several years. However, the industry average (XLU) is currently near 19x. Southern Company is currently trading at a PE multiple of 17.5x, while Duke’s PE multiple is near 18x.

Lately, US utilities have been moving in response to the Federal Reserve’s comments regarding interest rates. Interest rates can impact utilities due to their large capital expenditure needs. Rates can also directly impact utilities stocks’ prices, because these stocks usually act as bond proxies.

Higher interest rates tend to make bonds more attractive. The Fed’s tone will be an important cue for utilities going forward.

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