Analyzing Recent Changes in Southern Company s Indicators

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1 Analyzing Recent Changes in Southern Company s Indicators By Vincent Kruger Dec 23, :16 PM What s ahead for Southern Company's Stock? Chart indicators It hasn t been a merry season for utilities investors. 1H16 s outperformers found it difficult to maintain their rises in 2H16. The Utilities Select Sector SP DR ETF (XLU) has corrected nearly 10% in 2H16. The $48 billion Southern C ompany (SO) has witnessed similar weakness in the period. On December 22, 2016, Southern Company was trading at a 1% premium and a 3% discount to its 50-day and 200-day moving averages, respectively. These averages may act as support and resistance levels, respectively, in the near future. We can analyze a stock s moving averages via a price crossover of two or more of its moving averages. When a stock s price exceeds a particular moving average, it s a bullish sign, and vice versa. When a stock s shorter moving average crosses over its longer moving average, it s a buy signal for the stock. Relative strength index Southern C ompany s RSI (relative strength index) currently stands at 70. RSI is a momentum indicator measured by values between 0 and 100. Movements of below 30 are considered to be in

2 the oversold zone, and movements of above 70 are considered to be in the overbought zone. Extreme RSI levels may indicate imminent price reversals. Peer Xcel Energy (XEL) is currently trading at a 2% premium and a 2% discount to its 50-day and 200-day moving averages, respectively. Xcel Energy has seen a strong recovery this month. It s managed to rise nearly 8% so far. How Is Southern Company's Stock Currently Valued? Valuation In 2016, utilities were trading at record high valuations for quite a long period of time. Many are still trading at premium valuations despite modest corrections in the last few months. So, how is Southern C ompany (SO) placed compared to its peers? Southern C ompany is currently trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation of 12x. Its five-year historical average valuation multiple is 11x. The industry average is 10.5x. C ompared to its historical and industry averages, Southern C ompany is trading at a premium valuation. A stock s EV-to-EBITDA ratio indicates whether it s undervalued or overvalued, regardless of its capital structure. Enterprise value is the combination of a company s debt and equity minus its cash holdings. We ve considered SO s trailing-12-month EBITDA for this calculation. By comparison, Duke Energy (DUK), the largest utility by market capitalization, is trading at a valuation multiple of 10.3x. PPL Corporation (PPL) is trading at 11x. Pure-play regulated utility Xcel Energy (XEL) has a valuation multiple of ~10x. PE multiple

3 Let s see how utilities are valued in terms of their price-to-earnings (or P E) multiples. Southern Company is trading at a price-to-earnings multiple of 19x, while Duke Energy is trading at a PE multiple of ~20x. Utilities average P E multiple currently stands near 20x. Interestingly, utilities have historically traded at an average P E of ~15x. The current P E ratio roughly matches the broader equities (SP Y), which seems to show that utilities are currently expensive and not worthy of a market multiple due to their lower earnings growth. Is Southern Company's Stock Set to Soar in 2017? Market performance US utilities have mostly headed downward in 2H16, influenced by the Federal Reserve s interest rate hike commentary. In the last year, Southern Company (SO) has largely tracked the Utilities Select Sector SPDR ETF (XLU), rising nearly 4%. Going forward, interest rate normalization may pave the way for utilities. The chart above shows stock price movements of Southern Company and XLU in the last year. By comparison, peers Xcel Energy (XEL) and Duke Energy (DUK) have risen nearly 13% each in the last year. SO, DUK, and XEL: Analyzing the Total Returns of Top US Utilities Total return Though the total returns of US utilities have mostly been dominated by stock appreciation in 2016,

4 stable and increasing dividends have also been important. The Utilities Select Sector SPDR ETF (XLU) has returned 12% in the last year, outperforming the broader market (SPY). Southern Company (SO) has returned 5% in the same period. By comparison, Duke Energy (DUK) has returned 8% in the last year. We ve considered stocks total dividends and stock rises during the period to calculate their total returns. Southern Company s Price Targets and Growth Outlook for 2017 Price targets According to analysts estimates, Southern C ompany (SO) has a one-year median price target of $50.88, implying an upside of a mere 3% in the next year, compared to its current market price of $49.36.

5 The chart above shows analysts views on Southern Company as of December 22, There are currently 20 analysts tracking Southern C ompany. Peer Xcel Energy (XEL) has a median price target of $42.71, which implies an upside of 5% in the next year. According to analysts consensus estimate, Excelon C orporation s (EXC) one-year median price target is $38, implying a 7% upside from its current price of $36. Outlook Southern Company is expecting flattish EPS (earnings per share) growth this year due to a rise in its outstanding shares after its AGL Resources acquisition. The company s management is targeting long-term EP S growth of ~5%, in line with the industry average. According to the U.S. Energy Information Administration (or EIA), a colder-than-normal winter is expected in the United States from December 2016 to March C older temperatures could raise US electricity consumption by nearly 4%. Higher demand could also boost power prices, which is likely to help utilities. Following the Federal Reserve s 0.25% interest rate hike in December 2016, US interest rates are expected to rise again in What really matters for utilities (XLU) and investors is the pace of the rate increase. A near-term interest rate hike could force investors to switch to Treasuries, leading to a slump in utilities stocks. Utilities (XLU) are currently trading at a ~100 basis point premium to Treasuries.