With a daily gain of 2.1% and a three-month loss of 8.5%, Southern Co (SO, Financial) has demonstrated its volatility. The company currently has an Earnings Per Share (EPS) of 2.82. This article aims to determine whether Southern Co (SO) is modestly undervalued and provides a comprehensive analysis of the company's valuation. Let's delve into the details.
Company Introduction
Southern Co is one of the largest utilities in the U.S, serving 9 million customers with vertically integrated electric utilities in three states and natural gas distribution utilities in four states. The company owns 50 gigawatts of rate-regulated generating capacity and 13 gigawatts of natural gas generation and renewable energy across the U.S. Despite its current stock price of $64.03, Southern Co's GF Value, a measure of fair value, stands at $75.46. This discrepancy prompts a deeper exploration into the company's intrinsic value.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given its current price of $64.03 per share, Southern Co's stock is estimated to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Assessing Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Southern Co has a cash-to-debt ratio of 0.03, ranking worse than 88.13% of 480 companies in the Utilities - Regulated industry. This suggests a poor balance sheet, with GuruFocus ranking Southern Co's financial strength as 3 out of 10.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. Southern Co has been profitable 10 over the past 10 years. Its operating margin is 18.17%, which ranks better than 66.87% of 501 companies in the Utilities - Regulated industry. GuruFocus ranks the profitability of Southern Co at 7 out of 10, indicating fair profitability.
Growth is a crucial factor in a company's valuation. Southern Co's 3-year average annual revenue growth rate is 10%, ranking better than 59.46% of 481 companies in the Utilities - Regulated industry. However, its 3-year average EBITDA growth rate is -4.7%, ranking worse than 77.36% of 455 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) and the weighted average cost of capital (WACC) can offer insights into its profitability. For the past 12 months, Southern Co's ROIC is 3.21, and its cost of capital is 5.51. This suggests a need for improvement in the company's capital returns.
Conclusion
In conclusion, Southern Co (SO, Financial) is estimated to be modestly undervalued. The company's financial condition is poor, its profitability is fair, and its growth ranks worse than 77.36% of 455 companies in the Utilities - Regulated industry. For a deeper understanding of Southern Co's stock, check out its 30-Year Financials here.
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