NextEra Energy (NEE) is one of the largest utilities by market capitalization. It is still trading nearly 15% higher than its levels in 2015. But, how is it placed as 2017 approaches and is it fairly priced?
On December 23, 2016, NextEra was trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] ratio of 11.4x. Its five-year historical average valuation multiple also stands near 11x. The industry average is near 10.5x. So, NEE appears to be trading at a fair valuation compared to its peers and to its historical average.
The EV-to-EBITDA ratio indicates whether a stock is undervalued or overvalued, regardless of capital structure. EV is the combination of a company’s debt and market capitalization minus its cash holdings.
Where do NEE’s peers stand?
US utilities (XLU) have traded at a five-year historical average price-to-earnings multiple of 15x–16x. But on December 23, 2016, they were near 20x, trading at fair premiums to their historical averages. NEE is trading at a price-to-earnings multiple above 21x, whereas Duke Energy and Southern Company are both trading at price-to-earnings multiples of 19x.
Very few utilities are trading at fair valuations to their historical averages now, and NextEra is one of them. Interestingly, although utilities could become cheaper in the future, investors may still trade them cautiously going forward, considering the Fed’s aggressive rate hike target in 2017.