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Can Edison International’s 4Q15 Earnings Fuel a Rally?

Vincent Kruger

Can Edison International's 4Q15 Earnings Fuel a Rally?

(Continued from Prior Part)

Market performance

After a dismal performance in 2015, utilities are off to a good start this year. So far in 2016, utilities have gained more than 5%. Edison International (EIX) has also managed to gain 5% as of February 15. The slow pace of interest rate hikes from the Fed could trigger a rally in utilities this year.

The chart below shows the stock price movements for Edison International (EIX), Sempra Energy (SRE), Consolidated Edison (ED), and the Utilities SPDR ETF (XLU).

Valuation

As of February 15, Edison International is trading at an EV/EBITDA of 7.9x. Its five-year historical EV/EBITDA stands at 7.2x. Utilities’ (JXI) average ratio is 10x.

EIX’s forward EV/EBITDA for fiscal 2016, using its 2016 EBITDA estimate, comes in at 7.4x. This ratio indicates higher EBITDA for EIX in 2016. In comparison, Ameren (AEE) has an EV/EBITDA ratio of 8.4x while American Electric Power (AEP) has a ratio of 7.9x. Pacific Gas & Electric Corporation has a ratio of 8.2x.

The EV/EBITDA multiple indicates whether a stock is overvalued or undervalued regardless of the company’s capital structure.

EIX’s capital spending

Over the last couple of years, Edison International has shifted its business mix from generation to regulated distribution. Its spending plan focuses actively on grid modernization. Edison International intends to spend nearly $11.8 billion on capital projects in the next three years. EIX’s concentration on electric distribution instead of generation is a welcome move given that regulatory policies are fostering clean energy. Also, California has one of the highest allowed rates of return for utilities, which could drive growth for regulated distribution.

Continue to Next Part

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