Very few utility stocks from the S&P 500 Utilities Index (XLU) are currently trading at a fair valuation. FirstEnergy (FE) seems to be one of them. On September 7, 2017, it was trading at an EV-to-EBITDA multiple of 8.5x. Its five-year historical EV-to-EBITDA average is around 9.5x. Utilities, on average, are trading at a valuation multiple of 11x. Thus, FirstEnergy stock appears to be trading at a noteworthy discount to its historical average and to peers’ average as well.
The EV-to-EBITDA ratio indicates whether the stock is undervalued or overvalued, regardless of its capital structure. Enterprise value is the combination of a company’s debt and equity minus its cash holdings.
FirstEnergy’s large-cap peer and the largest hybrid utility in the country, Exelon (EXC), is currently trading at 7.7x. Its five-year EV-to-EBITDA average also comes in around the same levels. Thus, Exelon stock seems to be trading at a fair valuation compared to its historical average and at a deep discount compared to the industry average (XLU).
Hybrid utilities, in particular, seem to be trading at a decent discount compared to the industry valuation. However, investors seem concerned about allied risks due to the hybrid utilities’ less stable earnings and volatile stock price movements.
In the next article, let’s see what institutional investors are doing with their FirstEnergy holdings.