The Southern Co. – Value Analysis (NYSE:SO) : April 12, 2017

Capitalcube gives The Southern Co. a score of 59.

Our analysis is based on comparing The Southern Co. with the following peers – SCANA Corporation, Duke Energy Corporation, Dominion Resources, Inc., Entergy Corporation, American Electric Power Company, Inc., NextEra Energy, Inc., FirstEnergy Corp., PPL Corporation, NRG Energy, Inc. and El Paso Electric Company (SCG-US, DUK-US, D-US, ETR-US, AEP-US, NEE-US, FE-US, PPL-US, NRG-US and EE-US).

Investment Outlook

The Southern Co. has a fundamental score of 59 and has a relative valuation of NEUTRAL.

Fundamental Score

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Company Overview

  • Considering peers, relative underperformance over the last year and the last month suggest a lagging position.
  • It’s current Price/Book of 1.82 is about median in its peer group.
  • The market expects SO-US to grow at about the same rate as the peers and to maintain the median returns it currently generates.
  • SO-US‘s relative asset efficiency and net profit margins are both around the median level.
  • Change in the company’s annual revenues seems to be coming at the expense of earnings.
  • SO-US‘s return on assets currently and over the past five years is around the peer median and suggest that it does not have any particular operational advantages versus peers.
  • The company’s margins are around the peer medians and do not suggest any benefit from a pricing or an operating cost advantage versus peers.
  • While SO-US‘s revenues in recent years have grown faster than the peer median, the market gives the stock a P/E ratio that is around peer median suggesting that the market has some questions about the company’s long-term strategy.
  • The company is likely overinvesting in a business with only median returns.
  • SO-US might have enough interest coverage to take-on additional debt prudently.

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Leverage & Liquidity

SO-US might have enough interest coverage to take-on additional debt.

  • While SO-US‘s debt to enterprise ratio of 49.27% is on the high side compared to an overall benchmark of 25% (Note: The peer median is currently 45.84%), it also enjoys a relatively high interest coverage level of 4.03x which may give the company enough financial strength to support additional debt. Thus, the company is classified as having Some Capacity to raise more debt.
  • All 10 peers for the company have an outstanding debt balance.

SO-US has maintained its Some Capacity profile from the prior year-end.

  • SO-US‘s interest coverage is its lowest over the last four years and compares to a high of 4.79x in 2014.
  • Though its interest coverage decreased to 4.03x from 4.72x (in 2015), its peer median remained relatively stable during this period at 2.92x.
  • SO-US‘s debt-EV is its highest over the last four years and compares to a low of 35.81% in 2014.
  • The increase in its debt-EV to 49.27% from 40.08% (in 2015) was also accompanied by an increase in its peer median during this period to 45.84% from 45.24%.
  • Relative to peers, debt-EV rose 8.59 percentage points (and is now higher than its peer median).

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Key Liquidity Items

Company Debt/Enterprise Value (%) Current Ratio Interest Coverage (x) Cash Flow To Total Debt (%)
SCANA Corporation 42 0.73 3.31 17.72
Duke Energy Corporation 48.29 0.7 3.2 14.54
Dominion Resources, Inc. 41.27 0.52 2.92 14.41
Entergy Corporation 55.64 1.07 2.19 24.43
American Electric Power Company, Inc. 42.33 0.64 3.6 22.88
NextEra Energy, Inc. 36.18 0.68 2.53 21.67
FirstEnergy Corp. 62.9 0.41 2.12 14.27
PPL Corporation 45.84 0.54 3.43 17.66
NRG Energy, Inc. 87.14 1.46 1.25 11.1
El Paso Electric Company 42.04 0.54 2.69 21.14
Southern Company 49.27 0.75 4.03 10.27
Peer Median 45.84 0.68 2.92 17.66
Best In Class 36.18 1.46 4.03 24.43

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Company Profile

The Southern Co. operates as a holding company, which owns all of the common stock of the traditional operating companies and Southern Power Company and owns other direct and indirect subsidiaries. It operates business through the electricity sales by the Traditional Operating Companies and Southern Power segments. The Traditional Operating Companies includes of Alabama Power, Georgia Power, Gulf Power, and Mississippi Power, which are vertically integrated utilities providing electric service in four Southeastern states. The Southern Power segment constructs, acquires, owns, and manages generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. The company was founded on November 9, 1945 and is headquartered in Atlanta, GA.

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