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Analyzing Southern Company’s Current Valuation

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Jan. 17 2019, Published 5:48 p.m. ET

Valuation

Southern Company (SO) stock is trading at a forward PE ratio of 15x based on analysts’ EPS for 2019. The company appears to be trading at a discounted valuation compared to its historical valuation of 20x. Utilities at large (XLU) have an average forward PE ratio of ~16x–17x. The stock looks to be trading at a discount compared to its peers.

Analysts expect flattish EPS growth from Southern Company in 2019. At the same time, utilities are aiming for average earnings growth of 4%–6%. So, Southern Company’s slower earnings growth doesn’t seem to justify its valuation.

SO stk

Southern Company stock underperformed its peers last year. Southern Company fell 7%. Duke Energy (DUK) and Next Energy (NEE), the biggest utility by market capitalization, rose 3% and 12%, respectively, last year.

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Peers’ valuation

Duke Energy (DUK) stock is trading at a valuation multiple of 17.0x—lower than its five-year average PE ratio. Duke Energy seems fairly valued compared to peers’ average valuation. Duke Energy expects to grow ~4% annually for the next few years.

NextEra Energy’s forward PE multiple is ~21x, which is higher than its peers. NextEra Energy seems to be trading at a premium compared to the historical average. However, NextEra Energy is one of the fastest growing utilities in the country. Analysts expect more than 8% EPS growth in 2019. NextEra Energy has consistently grown around similar levels in the last decade.

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