Yahoo Finance NextEra Energy Outruns Peers in Utilities’ Atypical Rally
Will Customer Base Boost NextEra Energy's Revenue in 1Q16?
Market performance
NextEra Energy’s (NEE) stock has soared more than 12% in the last 12 months, with most of its rally coming in 2016. Its earnings growth in 4Q15 resulted in a steep climb. The rally in NextEra Energy’s stock was in line with the price movement of utilities (FXU). The slower pace of interest rate hikes triggered utilities’ rally in January 2016.
The chart above shows NextEra Energy has outperformed not only its utility peers but also the broader equity market (SPY) over the last year.
Valuation
As of April 20, 2016, NextEra Energy is trading at an EV-to-EBITDA ( enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 10.7x. The EV-to-EBITDA multiple is a valuation metric used to indicate whether a stock is overvalued or undervalued, regardless of capital structure. NextEra Energy’s five-year average EV-to-EBITDA multiple is 10.4. The industry average is around the same level. By comparison, Duke Energy (DUK) is trading at a multiple of 10.6x, while American Electric Power (AEP) is trading at 9.5x.
NextEra Energy’s forward EV-to-EBITDA multiple is around 9.9x. The fact that its forward multiple is lower than its current multiple indicates expectations of higher EBITDA in 2016. Almost all the utilities (PUI) have lower forward EV-to-EBITDA multiples than their current multiples. This suggests expectations of better earnings this year.
A dull 2015 for utilities resulted in their undervaluation, which made them more attractive at the beginning of 2016. As a result, utilities (IDU) strangely rallied like an aggressive sector. This rally now poses a risk of overvaluation. Is this an alarming signal of a correction ahead? First-quarter earnings and the Fed’s stance in the next couple of meetings will paint a clearer picture of what’s to come.
In the next part of this series, we’ll look at analysts’ recommendations for NextEra Energy ahead of 1Q16 earnings.
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