What are we looking for?
Since St. John's-based Fortis Inc. announced they are buying Arizona's UNS Energy, my colleague Rob Belanger and I thought we'd take a look at the U.S. electrical utility sector.
We ranked our companies by market capitalization and all had to be over $1-billion.
The price-to-earnings ratio (market value per share divided by earnings per share) has been used for more than 100 years to measure value and remains one of the most relevant metrics for comparing companies within a particular sector. Ideally we are looking for a low number.
Operating margin is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 9.5 per cent it means that it makes 9.5 cents, before interest and taxes, for every dollar of sales. A high number is preferable.
Retail sales are megawatt hours sold to residential, commercial, industrial, and other retail customers. Wholesale sales are megawatt hours sold to other utility systems in the same state, or elsewhere in the United States.
What did we find?
Atlanta-based Southern Co. owns four electrical utilities in the Southeast U.S., three nuclear power plants and a state-of-the-art coal gasification facility. Southern has one of the highest yields, a P/E of 15.06, and an operating margin of 32.71.
The most overvalued company on a P/E basis is Oklahoma-based OGE Energy Corp., which has a P/E of 20.68. OGE pays out the smallest dividend on the screen, yet has one of the highest operating margins.
American Electric Power sells wholesale electricity to 11 states through 350,000 kilometres of distribution lines. They sold more wholesale megawatt hours than any other company on our list.
Scana Corp. is the most undervalued firm on a P/E basis.
Investors would be well advised to conduct further research, or to contact an investment professional.
U.S. electrical utility sector
Story continues below advertisement