PPL Corporation (PPL) has corrected more than 13% in 2H16 so far. On November 23, 2016, PPL was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 10.2x. Its five-year historical average and industry multiple stand nearly at the same levels.
However, investors may shun PPL despite its being relatively fairly valued compared to its peers. The Brexit vote is expected to negatively impact its cash flows due to its significant operations in the United Kingdom.
The EV-to-EBITDA multiple indicates whether a stock is undervalued or overvalued, regardless of its capital structure. EV is the combination of a company’s debt and market capitalization minus its cash holdings.
Utilities have largely traded near an average PE multiple of 15x–16x in the last several years. PPL is currently trading at a PE multiple of 15x, much lower than the industry average. Duke Energy is trading at 18x, and the industry average is currently near 20x.
Lately, US utilities (XLU) have been moving in response to the Federal Reserve’s commentary. Interest rates can impact utilities due to their large capital expenditure needs. Interest rates can also directly impact utilities stock prices, because these stocks usually have high dividend yields. The Fed’s tone will remain an important cue for utilities going forward.