Most Eastern Utility Stocks Are Overvalued
Chuck Carnevale | Aug 12, 2012 03:03AM ET
As we stated in previous installments, the utility sector is experiencing a lot of change. With growth long inhibited by regulators, utilities throughout the country have been looking for ways to diversify their businesses and/or develop new markets. Another change that is sweeping the industry is mergers and acquisitions.
A few examples in the Eastern utility sector include Duke Energy (DUK) and Progress Energy merging, and Central Vermont Public Service Corporation (CV) was acquired by Green Mountain Power (GMP). Although these actions may prove to be successful, they do make analysis more difficult because there is scant history of the combined entities to scrutinize.
Eastern Utility Stocks Historical Overvaluation Is A Concern
The following table looks at the 14 surviving premier publicly-traded Eastern utility companies. A review of this table discloses that virtually every utility company in the Eastern portion of the United States is fundamentally overvalued today. There are a couple companies where you could argue for fair value or maybe full value instead of overvalued. However, as we pointed out in the previous installments of this series on utility stocks, due to their low growth histories, getting valuation correct before investing in a utility is more critical than it is for companies that typically grow faster.
One quick valuation check is to compare the current PE ratio of each utility stock on the below table against their historical normal PE ratio. Virtually every company on the list has a current PE ratio that is at worst higher than its historical norm, and at best equal to historical norms. However, we have continuously cautioned throughout this series on the importance of evaluating utility stocks one at a time over drawing conclusions in general.
Nevertheless, when reviewing the major utility companies in the Eastern portion of the United States, there are no bargains that we could find. There are only four companies with current PE ratios below historical norms (see green highlights on table below): Exelon Corp (EXC),
Public Service Enterprise Group (PEG), PPL Corp (PPL) and TECO Energy, Inc (TE).
Four Examples With Current PEs Below Historical Normal PEs
A quick review of the four examples of Eastern utility stocks (see green highlights on table) with current PE ratios below their historical norm shows that three of the four are currently experiencing declining earnings. And our fourth example, TECO Energy, is fully valued, although not overvalued.
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Exelon Corp (EXC) – Directly
“FirstEnergy Corp. (NYSE: FE) is a diversified energy company dedicated to safety, reliability and operational excellence. Its 10 electric distribution companies comprise one of the nation's largest investor-owned electric systems. Its diverse generating fleet features non-emitting nuclear, scrubbed baseload coal, natural gas, and pumped-storage hydro and other renewables, and has a total generating capacity of nearly 23,000 megawatts.”
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