Duke Energy (DUK) has corrected more than 12% since July 2016. The Utilities Select Sector SPDR (XLU) has also witnessed similar weakness during this period. The Federal Reserve’s upcoming December meeting is expected to drive utilities way ahead. Importantly, market experts are anticipating more than a 70% possibility of a rate hike in December. So, how are top US utilities valued currently?
On November 4, 2016, Duke Energy was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.3x. It’s trading at a marginal premium compared to the industry average of 10x. Interestingly, Duke Energy’s five-year historic EV-to-EBITDA multiple is near 11.5x.
Southern Company (SO) is trading at a valuation multiple of 11x. PPL (PPL) is also at 11x, while Xcel Energy (XEL) is near 10x. The EV-to-EBITDA ratio gives a comparative idea of 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.
Utilities have largely traded near an average PE (price-to-earnings) multiple of 15x in the last several years. However, they haven’t fallen close to these levels this year. Currently, Southern Company is trading at a PE multiple of 17.5x, while Duke is at 17x. The industry average is near 20x.
Duke Energy is one of the largest utilities by market capitalization in the United States. It yields more than 4.4%, which is a premium of nearly 200–250 basis points to the Treasuries and even to the broader market (SPY) yield.