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.
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.
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.