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Southern Company Rose 2% from the Day’s Low after 1Q16 Results

Vincent Kruger

Southern Company: Still Not a Tempting Option after 1Q16

(Continued from Prior Part)

SO rose after 1Q16 earnings

Southern Company (SO) reported its quarterly results prior to the Market’s open on April 27, 2016. It closed the day by rising 0.7%. So far in 2016, SO has risen 8%, underperforming utilities at large. The Utilities Select Sector SPDR ETF (XLU) rose 12% in the same period. However, Southern Company has outperformed utilities in the last year.

Noticeably, the rally in midsize regulated utilities was much steeper than it was in large-capitalization regulated utilities. Duke Energy (DUK) and Dominion Resources (D) have each risen nearly 10% since the start of 2016, while Consolidated Edison (ED) and Edison International (EIX) have risen 15% and 19%, respectively, in the same period.

Valuation

As of April 28, 2016, Southern Company is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation of 10.5x. Southern Company’s five-year historical EV-to-EBITDA average is 10.4x. The industry average (FUTY) is around 10.5 levels only.

By comparison, Duke Energy is trading at a multiple of 10.6x, while American Electric Power (AEP) is trading at a multiple of 9.5x.

Southern Company’s forward EV-to-EBITDA is around 9.8x. The lower forward multiple compared to the current multiple indicates expectations of higher EBITDA for SO in 2016.

EV-to-EBITDA is a valuation metric used to indicate whether a stock is overvalued or undervalued, regardless of its capital structure.

Usually considered safe and stable, utilities (VPU) rallied aggressively in the first quarter of 2016. Utilities are now trading at a premium, and any unfavorable event may signal a bear raid. However, the Federal Reserve has been dovish on the interest rate front, which has kept utilities’ march going strong.

Continue to Next Part

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