Is Southern’s Valuation Attractive After Clean Energy Investment Announcement?

• Wondering if Southern is a hidden gem or just another utility stock? You're not alone, and there's more to its story than meets the eye.
• Southern's share price has seen some ups and downs lately, rising 0.5% in the last week but dipping 6.3% over the past month. It has still delivered impressive 12.0% year-to-date returns.
• The stock recently caught extra attention after Southern announced new investments in clean energy projects and completed a major grid infrastructure upgrade. These moves have fueled discussion about its long-term growth prospects and risk profile.
• According to our checklist, Southern clocks in with a 4 out of 6 valuation score, suggesting it may offer value in several areas. We'll dig into how these checks work and reveal an even better way to look at value by the end of this article.

Find out why Southern's 8.5% return over the last year is lagging behind its peers.

Approach 1: Southern Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting future cash flows and discounting them back to today's value, giving investors a sense of what the business is fundamentally worth.

For Southern, the DCF uses the Two-Stage Free Cash Flow to Equity model based on projections for the next decade. Currently, Southern's last twelve months' Free Cash Flow stands at negative $1.01 Billion, highlighting near-term cash outflows. According to available estimates, Free Cash Flow is expected to rebound over the coming years, reaching $2.10 Billion by 2027. These five-year analyst forecasts are extended by Simply Wall St to cover ten years, with the model projecting an impressive $19.45 Billion Free Cash Flow in 2035.

After discounting all these projected future cash flows to their present value, the model calculates an intrinsic value per share of $294.33. With Southern's current trading price, this suggests the stock is trading at a 68.8% discount to its calculated fair value. This implies it is significantly undervalued at this moment.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Southern is undervalued by 68.8%. Track this in your watchlist or portfolio, or discover 883 more undervalued stocks based on cash flows.

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

Approach 2: Southern Price vs Earnings

The Price-to-Earnings (PE) ratio is a popular metric for valuing profitable companies like Southern because it directly connects the company’s share price with its earnings power. A lower PE can be a signal that a stock is undervalued relative to its earnings, while a higher PE may reflect expectations of growth, stability, or lower risk.

When comparing PE ratios, it is important to consider both growth expectations and perceived risk. Fast-growing or lower risk utilities can sustain higher PE ratios, while slower growers or riskier firms should trade at a discount.

Southern is currently trading at a PE ratio of 22.7x, just below its peer group average of 26.3x and above the Electric Utilities industry average of 21.0x. On the surface, this positions Southern as reasonably valued in its sector, but focusing only on these benchmarks can miss the nuances of each business.

Simply Wall St’s Fair Ratio, which incorporates factors like Southern's earnings growth, profit margins, market cap, industry, and business risks, suggests a fair PE of 23.3x. This proprietary ratio provides a more precise valuation "target" than simply looking at average multiples. By tailoring expectations to the company’s profile, it captures the bigger picture for what investors should actually pay.

With Southern’s actual PE (22.7x) almost matching its Fair Ratio (23.3x), the stock appears very close to fair value on earnings.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1403 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Southern Narrative

Earlier we mentioned that there's an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is your personal take on a company's story, combining your assumptions about its future revenue, earnings potential, and margins to map out what you believe the business is truly worth. By linking the company's story with a clear financial forecast and a resulting fair value, Narratives go beyond the numbers to help you decide when to buy or sell.

On Simply Wall St's platform, millions of investors use Narratives on the Community page to transparently state their views, compare against others, and adjust as new information like earnings or news is released. Narratives are dynamic and automatically update their fair value when events impact the story, ensuring your assessment stays current.

For Southern, some investors' Narratives might be shaped by confidence in robust revenue growth and improved margins resulting in a high price target of $108, while others with concerns about regulatory or cost risks might see fair value closer to $75.

Narratives make valuation accessible, personalized, and adaptable, empowering you to make smarter decisions based on both your perspective and real-time developments.

Do you think there's more to the story for Southern? Head over to our Community to see what others are saying!

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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