Valuation

In this part, let’s take a look at valuations of utility stocks. AES (AES) stock is trading at a forward PE ratio of 13.0x based on analysts’ earnings estimates. Utilities (XLU) at large are trading at a forward PE ratio of 17x–18x. AES’s five-year historical average PE ratio is higher than the forward multiple. It seems to be trading at a discounted valuation compared to its peers and its historical average. AES has soared 63% over the past 12 months. It is presently trading close to its ten-year high.

AES, NRG, and PEG: Analyzing Their Current Valuations

Are utilities cheap even at multiyear highs?

Merchant power stock NRG Energy (NRG) stock is trading at a forward PE ratio of 10.6x based on analysts’ projected EPS for the next 12 months. NRG Energy has risen almost 40% over the past 12 months. NRG Energy stock looks to be trading at an attractive valuation given its lower forward PE ratio compared to peers’ average. It seems at a reasonable valuation considering the company’s higher potential EPS growth in 2019 based on estimates.

Public Service Enterprise Group (PEG) stock is trading at a forward PE multiple of ~18x, close to peers’ average. Its five-year average PE is around ~20x. Thus, PEG stock looks to be trading at a discounted valuation at the moment. PEG stock has risen more than 25% over the past 12 months.

The chart above shows the normalized stock price movement of utilities (XLU) at large versus broader markets over the past year. The defensive utilities (IDU) (VPU) notably outperformed the S&P 500 in this period.

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