Duke Energy’s valuation
Among US utility giants, Duke Energy (DUK) stock appears to be trading at a fair valuation compared to peers. It’s currently trading at an EV-to-EBITDA valuation multiple near 10x. The industry average valuation stands near 10.5x. Duke’s five-year average EV to EBITDA is 11x.
Duke Energy seems fairly valued compared to peers like Southern Company (SO) and NextEra Energy (NEE), both of which are trading at a valuation multiple of 12x. Dominion Resources (D) is trading at a valuation of 15x.
An EV-to-EBITDA ratio indicates whether a stock is undervalued or overvalued regardless of its capital structure. EV represents the combination of a company’s debt and market capitalization, minus its cash holdings.
In terms of price-to-earnings multiples, Duke Energy and Southern Company are both currently trading at multiples above 18x. US utilities (XLU) seem to be trading at a marginal premium considering their price-to-earnings (or PE) multiple. Historically, they traded near a PE multiple of 15x–16x, and they are currently above 19x. In 2016, the utilities’ PE ratio was above 20x.
US utilities seem fairly valued this year compared to their towering valuations last year. However, they may again become pricey if investors turn to utility stocks in order to safeguard their portfolios.
For more industry analysis, read What’s Ahead for Utilities as Fed Raises Rates for Third Time?