Sempra Shares Are Climbing Today - Are They Overvalued?

One of Wall Street's biggest winners of the day is Sempra, a oil & gas transportation and processing company whose shares have climbed 3.5% to a price of $77.03 -- 8.36% below its average analyst target price of $84.06.

The average analyst rating for the stock is buy. SRE may have outstripped the S&P 500 index by 3.0% so far today, but it has lagged behind the index by 17.2% over the last year, returning 6.2%.

Sempra operates as an energy infrastructure company in the United States and internationally. 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.

Sempra's trailing 12 month P/E ratio is 17.0, based on its trailing EPS of $4.52. The company has a forward P/E ratio of 14.9 according to its forward EPS of $5.16 -- 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 second quarter of 2024, the utilities sector has an average P/E ratio of 20.35, and the average for the S&P 500 is 27.65.

SRE’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Sempra, we obtain a PEG ratio of 2.63, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

Sempra's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 6,218,000 8,397,000 -2,179,000 48.3
2022 1,142,000 5,357,000 -4,215,000 -259.34
2021 3,842,000 5,015,000 -1,173,000 43.74
2020 2,591,000 4,676,000 -2,085,000 -236.29
2019 3,088,000 3,708,000 -620,000 -2114.29
2018 3,516,000 3,544,000 -28,000
  • Average free cash flow: $-1716666666.7
  • Average free cash flown growth rate: -46.4 %
  • Coefficient of variability (lower numbers indicating more stability): 0.0 %

The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. A negative cash flow is common, even among successful companies. But if SRE's free cash flow continues on its negative trend, it may not be able to sustain its dividend payments, which over the last 12 months has yielded 3.2% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Sempra has a P/B ratio of 1.73. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Utilities sector, which stood at 2.27 as of the second quarter of 2024.

Sempra is by most measures overvalued because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and negative cash flows with a downwards trend. The stock has strong growth indicators because it has a an average PEG ratio and weak operating margins with a positive growth rate. We hope you enjoyed this overview of SRE's fundamentals.

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.