Valuation Dashboard: Utilities- Update
Summary 3 key factors are reported across industries in Utilities. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow up on a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Utilities. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Three industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name. For example, D-P/E = (AvgP/E – P/E)/AvgP/E. It can be interpreted as a percentage in under-pricing relative to a historical baseline: the higher, the better. It points to over-pricing when negative. ROE is already a percentage. That’s why we take the simple difference: D-ROE = ROE – AvgROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. The price-to-cash-flow ratio used in my dashboards for other sectors has been eliminated here, because discontinuities and outliers make it often irrelevant in Utilities. Industry valuation table on 11/4/2015 The next table reports the 3 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are 3 columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S ROE Avg D-ROE Electric Utilities 18.06 15.94 -13.30% 1.74 1.22 -42.62% 9.24 10.43 -1.19 Gas Utilities 21.3 17.24 -23.55% 1.4 0.97 -44.33% 10.5 11.49 -0.99 Multi-Utilities 19.44 16.59 -17.18% 1.64 0.95 -72.63% 9.59 9.48 0.11 Water Utilities 22.66 23.68 4.31% 5.06 3.94 -28.43% 3.01 7.96 -4.95 Ind.Power Prod. & Energy Traders* 44.08 34.9 -26.30% 2.59 4.16 37.74% -3.42 -5.15 1.73 * Averages since 2005 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF ( XLU ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion XLU has underperformed SPY by about 4% in the last 3 months. On this period, the 5 best performing S&P 500 Utilities stocks are NiSource Inc. (NYSE: NI ), Pepco Holdings Inc. (NYSE: POM ), PPL Corp (NYSE: PPL ), SCANA Corp (NYSE: SCG ), TECO Energy Inc.(NYSE: TE ). NI hit an all-time high in November. Valuation factors have slightly improved since last month for Electric and Gas Utilities, but these industries stay in the weakest positions with all metrics in negative territory. Independent Power Producers and Energy Traders are above their baseline in quality, but valuation factors are mixed. There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Utilities beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.