US utility stocks have rallied more than 14% so far this year, outperforming broader markets by a fair margin. They became expensive compared to a few months ago. Currently, they’re trading at an EV-to-EBITDA valuation multiple of 11x. They seem fairly overvalued compared to their historical EV-to-EBITDA average of 8x–9x.
Leading renewable energy developer NextEra Energy (NEE) is currently trading at a valuation ratio of 13x. It has its five-year historical average near 11x. Duke Energy (DUK) has its valuation ratio near 12x against its historical average of 11x. Southern Company (SO) is currently trading at a valuation multiple of 11.2x. Its historical average is near 11x. Southern Company stock looks relatively fairly valued compared to peers and even to its own historical average.
The chart above shows how Utilities Select Sector SPDR (XLU) fared against broader markets in the last year.
Utilities’ price-to-earnings multiples also imply their magnified valuations. Historically, they traded near PE multiples of around 14x–15x while they’re presently trading at 17x–18x.
NextEra Energy’s PE ratio is near 19x while Duke Energy’s is around 21x.
Going forward, utilities continue to appear sound and stable—even after their premium valuations—primarily because of their fundamental strength. They posted modest earnings growth in 2Q17 year-over-year. Given their fair earnings growth and the Fed’s current pace of interest rate increases, there doesn’t seem any grave risk for utilities that could significantly weaken them soon.
Very few utility stocks are currently trading at a fair valuation among S&P 500 Utilities Index. To read more, see These SPX Utilities Look Fairly Valued despite Their Epic Rally.