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EXC, FE, and PEG: What Do Their Current Valuations Indicate?

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Valuations

Hybrid utilities are currently trading at a fair discount compared to utilities at large. Exelon Corporation (EXC) is currently trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] valuation multiple of 7.7x.

The EV-to-EBITDA ratio indicates whether the stock is undervalued or overvalued irrespective of its capital structure. Enterprise value is the combination of a company’s debt and equity minus its cash holdings. Let’s see where the other utilities are on the scale of the EV-to-EBITDA ratio compared to Exelon. We have considered an EBITDA of the trailing 12 months for this calculation.
Valuation

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Where do EXC’s peers stand?

FirstEnergy (FE) is currently trading at an EV-to-EBITDA valuation of 9x while the multiple of Public Service Enterprise Group (PEG) stands at 9.3x. Importantly, average EV-to-EBITDA multiple for utilities is slightly above 10x. These competitive utilities appear to be trading at a fair valuation compared to the sector average.

PE multiple

Let’s see how our hybrid utilities are valued when compared to the price-to-earnings (or PE) multiple. Exelon is trading at a price-to-earnings ratio of 25x while Public Service Enterprise Group (PEG) is trading near a PE multiple of 17x.

The average PE multiple of utilities currently stands near 20x, and utilities’s (VPU) PE ratios have crossed 18x. Utilities have historically traded at a PE of ~15x.

The current PE ratio roughly matches the broader equities (SPY). This seems to show that utilities are currently expensive and not worthy of a market multiple due to their lower earnings growth.

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