PPL: Market performance and valuation
PPL (PPL) corrected 1.0% after it released its third-quarter earnings on November 1, 2016. The Utilities Select Sector SPDR ETF (XLU) corrected nearly 2.0% that day. PPL stock experienced severe pressure after the Brexit vote in June 2016. Since then, it has corrected more than 15.0%, while XLU has fallen nearly 4.0%.
On November 1, 2016, PPL was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 11.1x. Its five-year historical average and industry average multiple were at similar levels.
Investors might shun PPL (PPL) despite the fact that it’s fairly valued compared to its historical average. The Brexit decision may negatively affect its cash flow due to its significant operations in the United Kingdom.
Where do its peers stand?
The EV-to-EBITDA ratio gives a comparative idea of a company’s valuation, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt, less its cash holdings.
Utilities have largely traded near an average PE (price-to-earnings) multiple of 15.0x over the last several years. However, they’ve been trading at a premium to this level lately despite interest rate hike fears due to uncertainty in the broader markets.
PPL is trading at a PE multiple of 16.0x. Southern Company is currently trading at a PE multiple of 17.0x, while Duke is at 17.3x. The industry average (XLU) is currently near 19.0x.
The fragility of US utility stocks became apparent recently when the Fed turned hawkish again on a rate hike. Third-quarter earnings and interest rate developments are likely to pave the way for utility stocks going forward.