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How Is NextEra Energy Valued before Its 4Q16 Results?

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NextEra Energy: valuation

On January 19, 2017, NextEra Energy (NEE) was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of 11x. Its five-year historical average valuation multiple stands near 11x, while the industry average is near 10.5x, and so NEE appears to be trading at a relatively fair valuation, as compared to its historical average.

The EV-to-EBITDA ratio indicates whether a stock is undervalued or overvalued, regardless of its capital structure. EV is the combination of a company’s debt and market capitalization, minus its cash holdings.

NEE stk

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Where do NEE’s peers stand?

Duke Energy’s (DUK) EV-to-EBITDA ratio is 10.3x, while Southern Company’s (SO) EV-to-EBITDA ratio is near 12x. American Electric Power (AEP) is currently trading at a valuation multiple of 10x.

After trading at elevated levels throughout 2016, many utilities are now returning to relatively fairer valuations, as compared to their historical averages, among them NextEra Energy and Duke Energy. Interestingly, although utilities have recently become cheaper, investors will likely still trade them cautiously going forward, considering the Fed’s aggressive rate hike target in 2017.

To be sure, US utilities (XLU) have been moving in response to the Fed’s commentary. Interest rates can impact utilities due to their large capital expenditure needs. Interest rates can also directly impact utilities’ stock prices, as higher rates can make utilities less attractive. The Fed’s tone will remain an important cue for utilities going forward.

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