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Is the Worst Yet to Come for PG&E Investors?


Dec. 27 2017, Updated 10:30 a.m. ET

PG&E Corporation

The stock of California’s PG&E Corporation (PCG) has shown tremendous weakness in the last couple of months after the company was indicated as one of the possible causes of the wildfires in the state. PG&E recently reported that its financial condition, including its operations, liquidity, and cash flows, could be adversely affected if it is unable to pay for the damages caused by the wildfires.

On December 21, 2017, PCG announced that it had suspended its 4Q17 dividend due to uncertainty related to the liabilities associated with the California wildfires.

In 4Q17, since the wildfires began, PG&E stock has corrected by more than 26%. In the same period, the Utilities Select Sector SPDR ETF (XLU) has risen marginally.

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PG&E is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 7x—substantially lower than utilities’ average valuation of 11x. Its five-year historical average valuation is near 9x. PG&E stock seems to be trading at a striking discount to both its historical average and the industry average.

Edison International (EIX), PG&E’s peer and the smallest utility among its peers in California, is trading at an EV-to-EBITDA multiple of ~10x. Sempra Energy’s (SRE) valuation ratio is over 15x.

Analysts’ price target

According to analysts, PG&E stock has a mean target price of $59.6 compared to its current market price of $51.1. This difference indicates an implied rise of ~17% for the stock going forward.

Among the 14 analysts covering PG&E, five recommend it as a “buy” while nine recommend it as a “hold.” No analysts have rated PG&E stock as a “sell” as of December 21, 2017.

On December 21, Deutsche Bank cut PCG’s price target from $65.0 to $61.0. RBC also cut its price target from $66.0 to $50.0.

For more information, read The Top 5 Rallying S&P 500 Utilities Stocks of 2017.


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