Is Constellation Energy's Stock Overvalued?

With an average analyst rating of buy, Constellation Energy is clearly an analyst favorite. But the analysts could be wrong. Is CEG overvalued at today's price of $180.9? Let's take a closer look at the fundamentals to find out.

Constellation Energy has a P/E ratio of 36.1 based on its 12 month trailing earnings per share of $5.01. Considering its future earnings estimates of $7.92 per share, the stock's forward P/E ratio is 22.8. In comparison, the average P/E ratio of the Utilities sector is 17.53 and the average P/E ratio of the S&P 500 is 15.97.

Constellation Energy's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 0.94 Price to Earnings Growth (PEG) ratio. In CEG's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.

We can also compare the ratio of Constellation Energy's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. CEG has a P/B ratio of 5.25, with any figure close to or below one indicating a potentially undervalued company.

A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Constellation Energy's quick ratio is 0.629. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.

Now we turn to the actual cash that Constellation Energy has on hand after all of its inflows and outflows of capital have been accounted for -- including non business related items such as the cost of maintaining its debt. This final bottom line is called levered free cash flow, and for Constellation Energy it stands at -$7.72 Billion. This negative cash flow could mean the company may not be able to sustain its 0.6% dividend for much longer.

By most metrics, Constellation Energy is an overvalued stock. So why are analysts giving it such a generous rating? It probably has to do with their perception of its strong growth potential, as represented by its low PEG ratio. For growth-oriented investors, CEG is represents an interesting opportunity despite its elevated valuation. They just need to be sure that the growth story will come true. We will continue to monitor the stock to see which thesis prevails.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.