Electric Utilities company Constellation Energy is standing out today, surging to $175.59 and marking a 3.3% change. In comparison the S&P 500 moved only 0.0%. CEG is 13.29% above its average analyst target price of $155.0, which implies future downside for the stock.
Yet the average analyst rates it as buy, a surprinsingly upbeat outlook. Over the last year, Constellation Energy shares have outperformed the S&P 500 by 88.8%, with a price change of 115.7%.
Constellation Energy Corporation generates and sells electricity in the United States. The company is a utility, providing a public service and subject to extensive regulations. As stocks, utility companies are favored because they generally offer generous dividends, and their price usually demonstrates some resistance to market volatility.
On the other hand, these companies tend to accumulate large amounts of debt in order to fund their massive infrastructure investments, which makes their financial prospects highly sensitive to interest rate changes. Even small increases in interest rates can vastly increase their indebtedness. Another risk facing this sector is how it can adapt to new federal clean energy regulations and a shift towards renewables.
Constellation Energy's trailing 12 month P/E ratio is 35.0, based on its trailing EPS of $5.01. The company has a forward P/E ratio of 23.9 according to its forward EPS of $7.35 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the utilities sector has an average P/E ratio of 17.53, and the average for the S&P 500 is 15.97.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Constellation Energy's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.73. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing CEG's growth potential .
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Constellation Energy's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 5, so the company's assets may be overvalued compared to the average P/B ratio of the Utilities sector, which stands at 1.71 as of the first quarter of 2023.
With a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and No published cashflows with an unknown trend, we can conclude that Constellation Energy is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a unknown rate of growth, and no PEG ratio.
