Southern Company: Valuation
Southern Company (SO) is currently trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] valuation of 12x. Its five-year historical average valuation multiple is 11x. The industry average is 10.5x. Compared to its historical and industry averages, Southern Company seems to be trading at a premium valuation.
Where do SO’s peers stand?
A stock’s EV-to-EBITDA ratio indicates whether it’s undervalued or overvalued, regardless of its capital structure. Enterprise value is the combination of a company’s debt and equity minus its cash holdings. We’ve considered SO’s trailing 12-month EBITDA for this calculation.
After trading at record-high valuations throughout 2016, many utilities are now returning to relatively fairer valuations compared to their historical averages. In our view, however, Southern Company still seems a bit pricey at these levels. Peers Duke Energy and American Electric Power appear to be trading at relatively fair multiples.
Although utilities have recently become cheaper, investors could still trade them cautiously going forward, considering the Fed’s aggressive rate hike target in 2017.
Utilities (XLU) seem to be trading at a fair premium compared to their price-to-earnings ratios. Their average PE multiple currently stands near 19x–20x. Interestingly, utilities have historically traded at an average PE of 15x–16x. The current PE ratio roughly matches the broader equities (SPY), which seems to show that utilities are currently expensive and not worthy of a market multiple due to their lower earnings growth.