Southern Company’s valuation
Southern Company (SO) stock appears to be trading at a premium compared to peers. It’s currently trading at an EV-to-EBITDA valuation multiple near 12.2x. The industry average valuation is near 10.5x. Southern’s five-year average EV to EBITDA is 11x.
Duke Energy (DUK) seems fairly valued compared to Southern Company (SO) and NextEra Energy (NEE). Duke is trading at a valuation multiple of 10x while NextEra Energy (NEE) is near 12.2x. Dominion Resources (D), another large-cap utility, is trading at a valuation of 15x.
The EV-to-EBITDA ratio lets investors compare companies’ valuations regardless of capital structure. EV is the combination of a company’s market capitalization and debt, minus its cash holdings.
Considering utilities’ price-to-earnings multiple, Duke Energy and Southern Company are both currently trading at multiples above 19x. US utilities (XLU) seem to be trading at a marginal premium considering their price-to-earnings (or PE) multiples. Historically, they traded near a PE multiple of 15x–16x, and they are currently at ~18x. In 2016, the PE ratio of utilities 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.
Read Southern Company and Duke Energy: A Dividend Face-Off for more analysis.