On December 14, 2017, FirstEnergy (FE) stock was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 8.5x. Its five-year historical valuation is ~9.5x, while utilities are currently trading at a valuation multiple of 11.0x. FirstEnergy stock looks to be trading at a significant discount to its historical average and to peers’ average as well.
Very few utility stocks from the S&P 500 Utilities Index (XLU) are currently trading at a discounted valuation. FirstEnergy seems to be one of them. Large-cap utility stocks like Dominion Energy (D) and NextEra Energy (NEE) are currently trading at a significant premium compared to their respective historical averages.
The above chart shows the comparative stock price movement of FirstEnergy stock along with broader utilities and broader markets (SPX-INDEX) (SPY). FirstEnergy stock has risen 3% year-to-date, while the Utilities Select Sector SPDR ETF (XLU) has risen 16% during the same period.
Notably, FirstEnergy’s peer and the largest competitive utility in the country, Exelon (EXC) also seems to be trading at a discounted valuation. Exelon is trading at an EV-to-EBITDA valuation below 8x. Its five-year historical valuation average is near 8x. Exelon appears to be valued attractively compared to its peers.
Competitive utilities seem to be trading at relatively fairer valuations compared to broader utilities (XLU). Relatively less stable earnings could be one of the main reasons behind competitive utilities’ discounted valuations.
To learn about the top ten utilities, read An Investor’s Guide: A Look at the 10 Largest S&P 500 Utilities.