Southern Company Is Set to Rise on Strong Infrastructure Spending
(Continued from Prior Part)
Outlook
Southern Company’s (SO) focus on its regulated segment could significantly improve its risk profile. SO’s efforts in capacity addition and its acquisition of AGL Resources (GAS) are likely to have positive impacts on its earnings. The company’s management estimates that its earnings for 4Q15 will come in at $0.43 per share. For the same period in 2014, earnings were $0.36 per share.
The company’s Vogtle nuclear plant will be operational after 2019, but continual project delays and additional costs may become a point of concern for Southern Company.
Valuation
Currently, SO is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.2x. Its five-year historical average EV-to-EBITDA multiple stands near 9.6x.
SO’s forward EV-to-EBITDA, with an estimated EBITDA for fiscal 2016, stands at 9.6x. This indicates expectations of a higher EBITDA in 2016. SO’s EV-to-EBITDA multiple is higher than Duke Energy’s (DUK) 8.6x. NextEra Energy’s (NEE) EV-to-EBITDA stands at 9.2x, while Exelon’s (EXC) multiple stands at 5.5x
EV-to-EBITDA is a valuation metric that indicates whether a stock is overvalued or undervalued, irrespective of capital structure.
Price targets
According to Wall Street analysts’ estimates, Southern Company has a one-year price target of $47.2. It’s currently trading at $46.6 as of January 9, 2015. This amounts to an estimated upside of just 1.3%. Of the 21 analysts tracking Southern Company, 14 recommend it as a “hold” and six recommend it as a “sell.” One analyst recommends it as a “buy.”
DUK has a one-year estimated upside of ~6%, according to analyst estimates. It has a price target of $75.9 against its current market price of $71.8. Another utility (VPU) behemoth, NextEra Energy (NEE), has an estimated price target of $117.6. This amounts to a possible upside of 11%. NEE is currently trading at $105.6.
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