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Utilities Rally following the Fed’s Dovish Stance on Rates

Vincent Kruger

PPL's Earnings Fall by 12% in 4Q15

(Continued from Prior Part)

Market performance

Interest rates can have a substantial impact on utility companies’ performances, as they tend to carry huge debt on their books. The Fed’s dovish stance on raising interest rates revived utility stocks last month.

In January 2016, many utilities rallied over the expectation of a slower-than-expected pace of interest rate hikes. In contrast, utilities (FXU) corrected 8% last year for fear of higher interest rates. PPL (PPL) corrected 6% last year.

Valuation

Currently, PPL is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 11.4x. Its five-year historical average EV-to-EBITDA multiple stands near 9.4x. The utility sector’s (JXI) average ratio stands at 10.8x.

PPL’s forward EV-to-EBITDA, with an estimated EBITDA for fiscal 2016, stands at 10.1x. This indicates the expectation of a higher EBITDA for the company in 2016. PPL’s EV-to-EBITDA multiple is higher than Sempra Energy’s (SRE) 12.7x. Consolidated Edison’s (ED) ratio is 10x.

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

Capital spending plan and debt

PPL plans to spend $16 billion in capital over the next five years, mainly to strengthen its transmission and distribution network. Most of this spending is expected to be financed by debt. As of December 31, 2015, PPL has total debt of $20 billion. Its capital spending plan may increase its leverage substantially.

Standard & Poor’s has issued PPL a credit rating of “A-” with a “stable” outlook. With its investment-grade credit rating, PPL may raise funds from capital markets if needed.

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