Mild Weather Hit Utilities Again, PEG Reported a 12% Fall in EPS
Utilities’ rally in 2016 was all inclusive. All of its subsectors showed handsome gains. From regulated utilities to merchant power players and from small caps to large caps, almost all of the utility stocks surged due to favorable interest rate developments. Hybrid utilities also displayed a good run since the start of 2016. Public Service Enterprise Group (PEG) gained more than 15% while FirstEnergy (FE) rose 10%. Exelon (EXC) rose nearly 30% in the same period.
The following chart shows comparative stock price movements of Public Service Enterprise and its other utility peers (JXI). However, hybrid utilities underperformed broader utilities in the past year due to their relatively dismal performance in 2015.
As of May 2, 2016, Public Service Enterprise is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 7.8x. Its average five-year EV-to-EBITDA is near 7x. This shows that Public Service Enterprise is trading at a premium compared to its five-year historical EV-to-EBITDA valuation.
Public Service Enterprise’s forward EV-to-EBITDA multiple for fiscal 2016, using its 2016 EBITDA estimate, is 7.9x. This indicates expectations of slightly lower EBITDA for the company in 2016. The utility sector’s (VPU) EV-to-EBITDA average is 8x.
In comparison, FirstEnergy (FE) has an EV-to-EBITDA ratio of 7.5x. Entergy (ETR) has a ratio of 7.5x. Exelon’s EV-to-EBITDA ratio is 6.3x. The EV-to-EBITDA multiple is a valuation metric that indicates whether a stock is overvalued or undervalued regardless of the company’s capital structure.
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