The stock of Sempra Energy (SRE, Financial) has recently seen a daily loss of 50.06%, and a 3-month loss of 1.67%. Despite these losses, the company's Earnings Per Share (EPS) stands at 3.95. The question that arises is whether the stock is modestly undervalued. In this analysis, we will delve into the valuation of Sempra Energy to answer this question.
About Sempra Energy
Sempra Energy serves one of the largest utility customer bases in the United States. It distributes natural gas and electricity in Southern California and owns 80% of Oncor, a transmission and distribution business in Texas. SoCalGas and San Diego Gas & Electric distribute gas to more than 20 million customers, while Oncor serves more than 10 million Texas customers. Sempra Infrastructure partners, of which Sempra holds a controlling ownership, owns and operates liquefied natural gas facilities in North America and infrastructure in Mexico.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Sempra Energy Valuation
Sempra Energy (SRE, Financial) stock shows every sign of being modestly undervalued based on the GuruFocus Value calculation. GF Value is GuruFocus' estimate of the fair value that the stock should be traded at. It is calculated based on the historical multiples the stock has traded at previously, as well as past business growth and the future estimates of the business' performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $71.03 per share, Sempra Energy has a market cap of $44.70 billion and the stock shows every sign of being modestly undervalued.
Because Sempra Energy is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Financial Strength of Sempra Energy
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Sempra Energy has a cash-to-debt ratio of 0.04, which is worse than 83.26% of 478 companies in the Utilities - Regulated industry. The overall financial strength of Sempra Energy is 4 out of 10, which indicates that the financial strength of Sempra Energy is poor.
Profitability and Growth of Sempra Energy
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Sempra Energy has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $17 billion and Earnings Per Share (EPS) of $3.95. Its operating margin of 19.9% better than 70.92% of 502 companies in the Utilities - Regulated industry. Overall, GuruFocus ranks Sempra Energy's profitability as fair.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Sempra Energy is 5.9%, which ranks worse than 58.97% of 485 companies in the Utilities - Regulated industry. The 3-year average EBITDA growth rate is -3.5%, which ranks worse than 74.13% of 460 companies in the Utilities - Regulated industry.
ROIC vs WACC of Sempra Energy
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Sempra Energy's ROIC was 2.9, while its WACC came in at 5.92.
Conclusion
In short, the stock of Sempra Energy (SRE, Financial) shows every sign of being modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 74.13% of 460 companies in the Utilities - Regulated industry. To learn more about Sempra Energy stock, you can check out its 30-Year Financials here.
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