Is Hydro One’s 19% Surge in 2024 Backed by Real Value?

Thinking about what to do with Hydro One stock? You're not alone. Whether you've held shares through years of steady gains or are just now eyeing this utility giant after its recent run, making the right decision feels as important as ever. The numbers have been pretty compelling: Hydro One's price has doubled over five years, and the stock is up nearly 19% so far in 2024. Even the past month alone delivered a 7% climb, while the last week has held steady.

What’s driving all this? Recent headlines have highlighted Hydro One's ongoing infrastructure investments and partnerships geared toward renewable energy expansion, both key talking points as the demand for grid upgrades has never been higher. Investors have also responded to shifting sentiment about the stability and growth prospects in the utility sector. Risk perceptions are changing, and that has brought more eyes to Hydro One.

But the big question is valuation: are you getting in at a bargain, or are these price moves already baking in all the good news? Our valuation scorecard, summed across six industry-standard checks, gives Hydro One a score of 2 out of 6 for undervaluation. That means it's spot-on for some metrics and a little stretched on others. Next, let's break down each approach to see how they stack up. Stick around, because we'll discuss an even smarter way to cut through all the noise and get to the real value at the end.

Hydro One scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Hydro One Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model works by projecting a company’s future cash flows and then discounting them back to today’s value. This approach reveals what those future earnings are actually worth right now. For Hydro One, this analysis uses a two-stage Free Cash Flow to Equity approach in CA$.

Currently, Hydro One reported last twelve months’ free cash flow at a negative CA$519 Million, but forecasts show a major turnaround. Analysts project CA$388 Million in free cash flow by 2026, with an increase to approximately CA$1.8 Billion in 2027. Looking out ten years, extrapolated estimates suggest free cash flow could rise to CA$17.6 Billion by 2035, though forecasts this far out always carry greater uncertainty.

Based on these projections and discounting all future cash flows, the model calculates Hydro One’s intrinsic value per share at CA$598.19. The implied intrinsic discount in this case is 91.2%, indicating the stock is trading significantly below its estimated true value according to this model.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Hydro One.

Our Discounted Cash Flow (DCF) analysis suggests Hydro One is undervalued by 91.2%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Hydro One Price vs Earnings (PE Ratio)

For profitable companies like Hydro One, the Price-to-Earnings (PE) ratio is one of the most widely used measures to evaluate if a stock is attractively valued. The PE ratio gauges how much investors are willing to pay for each dollar of earnings, providing a quick way to compare value among peers and across the industry.

It is important to remember that what qualifies as a “fair” PE ratio is shaped by several factors, especially the company’s expected growth and perceived business risks. High growth prospects or a very stable earnings base usually support a higher PE, while riskier or slower-growing companies tend to see lower multiples.

Hydro One currently trades at a PE of 25x. By comparison, its industry group, Electric Utilities, averages a lower PE of about 14.6x, and the peer average sits around 18.4x. At first glance, Hydro One looks expensive relative to both measures.

However, Simply Wall St’s Fair Ratio digs deeper. This proprietary metric estimates what a “reasonable” PE should be for Hydro One right now, factoring in not just basic industry comparisons but also the company’s earnings growth potential, operating margins, market size, and particular risks. In Hydro One’s case, the Fair Ratio stands at 17.2x, a figure tailored to the company’s unique profile rather than generic sector averages.

Since Hydro One’s actual PE is well above its Fair Ratio, the stock appears overvalued using this approach.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Hydro One Narrative

Earlier, we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is your personal “story” about a company that goes beyond simple ratios or averages. It combines your assumptions for Hydro One’s future revenue, earnings, margins, and fair value with the reasons you believe those numbers are realistic.

Narratives work by linking your perspective on what drives Hydro One’s business to a transparent financial forecast and then to a dynamic fair value estimate. They help you see, at a glance, whether you think the current price undervalues the company or not. Even better, Narratives are simple to create and update right from the Community page on Simply Wall St, where millions of investors share viewpoints and track outcomes.

Because Narratives update automatically whenever new data or news comes in, your fair value always reflects the latest information rather than outdated projections. For example, with Hydro One, some investors believe strong grid modernization and stable regulation will justify a price as high as CA$59.0, while others focus on risks and set their fair value closer to CA$40.0. Both cases are driven by different stories about growth, risks, and market conditions. Narratives make it easy to compare these perspectives, decide which view aligns best with your own, and take action when the gap between price and fair value signals a buy or sell opportunity.

Do you think there's more to the story for Hydro One? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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