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SRE, EIX, and PCG: Analyzing Utilities’ Current Valuations




On December 23, 2016, Sempra Energy (SRE) was trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 16x. Utilities generally have a multiple of ~10.5x. Sempra’s five-year historical average stands at more than 12x. Sempra Energy appears to be trading at a fair premium compared to its historical average and to the industry average as well.

The EV-to-EBITDA multiple is a valuation metric that indicates whether a stock is overvalued or undervalued, regardless of its capital structure.


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Peer comparison

In comparison, PG&E (PCG) is trading at an EV-to-EBITDA valuation multiple of 12x. California’s smallest utility by market capitalization, Edison International (EIX), has a valuation multiple of 10x.

Sempra Energy (SRE) stock seems to be expensive considering its price-to-earnings (or PE) multiple, and it’s currently trading at a PE multiple of 21x. Utilities historically traded at a PE multiple of 15x–16x. However, they have never fallen below 18x–19x in 2016. The industry leaders by market capitalization—Duke Energy (DUK) and Southern Company (SO)—are currently trading at a PE multiple of 19x.

The current PE ratio of utilities 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.

California utilities are relatively better placed due to their healthy regulatory conditions and moderate temperatures. Sempra Energy’s operations are not only diversified geographically, but it also has a well-built exposure to midstream operations. The higher earnings growth offered by non-utility operations may even outpace SRE’s long-term growth and bodes well for the future.

For additional information on the utility sector, please read Why Do Utilities Pay High Dividends?


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