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Is AES Fairly Valued ahead of Its 4Q16 Earnings?

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Dec. 4 2020, Updated 10:53 a.m. ET

Valuation

AES Corporation (AES) has rallied steeply in the last year, rising more than 21%. The Utilities Select Sector SPDR ETF (XLU) has risen nearly 8% in the same period, and the broader market (SPY) (SPX-INDEX) has risen 22%. But has this rally made AES pricey? Let’s have a look at its current valuation.

AES seems to be trading at a relatively fair valuation compared to the industry average. However, it seems to be trading at a premium to its historical average. On February 17, 2017, it was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 8.4x. Currently, its five-year historical EV-to-EBITDA multiple is near 7.5x. The industry average is a little over 10x.

The EV-to-EBITDA ratio gives a comparative idea of the valuation of a company, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt minus its cash holdings.

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Peer comparison

Duke Energy (DUK) is currently trading at a valuation multiple of 10.4x, while NextEra Energy (NEE) is trading at a multiple of near 12x. Dominion Resources’ valuation ratio is just above 15x.

Factors such as slower-than-expected interest rate hikes and better quarterly results could fuel a rally in utilities (XLU), ultimately making them more expensive. On the other hand, overvalued utilities could see major corrections if these circumstances change, as we saw last year.

Read about which utility could pay you higher dividends in 2017 in D, DUK, NEE, and SO: Top Utilities’ Dividends.

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