Is Southern Company a Good Value Near Its All-Time High?

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This week, I’m covering another reader request: Southern Company (NYSE: SO), one of the nation’s largest energy providers.

The stock has been on a tear in recent weeks – and for good reason. Despite the utility sector not being known for explosive growth, the company has demonstrated a remarkable ability to generate consistent earnings through thick and thin.

Chart: Southern Company (NYSE: SO)

The company’s latest earnings release shows that adjusted earnings per share (EPS) for the first quarter of 2024 came in at $1.03, a healthy 30% increase over the prior year. This growth was driven by excellent performance across Southern’s regulated electric and gas utilities, with every segment posting “a strong start to 2024,” according to CFO Dan Tucker.

Management also reaffirmed its full-year adjusted EPS guidance range of $3.95 to $4.05, signaling confidence in the company’s near-term prospects. In addition to its steady earnings power, Southern Company boasts a rock-solid balance sheet.

CEO Chris Womack announced during Southern’s Q1 earnings call that the company’s Vogtle nuclear project – the largest nuclear power plant in the United States – is now complete and generating much-needed clean energy for the Southeast. With this major capital project in the rearview mirror, Southern is well positioned to fund its growth initiatives while maintaining a strong credit profile.

However, the question remains: Where does the stock stand in terms of its value? Let’s run it through The Value Meter to find out.

Southern’s enterprise value-to-net asset value (EV/NAV) ratio sits at 4.3, which means investors are paying over $4 for each dollar of Southern’s book value. That’s well below the average of 7 for companies with positive net asset values.

While that may seem like a decent discount, a closer look at Southern’s cash flow generation reveals why the market is giving it a more modest valuation.

Its quarterly free cash flow generation has been inconsistent over the past year, averaging a slightly negative -1.1% of the company’s net assets. That’s a bit better than the -3.8% average for other companies with similar cash flows, but it’s still not what we’d like to see.

However, management seems to have outlined a clear path for growing the company’s operating cash flow and continuing to improve its balance sheet in the coming years.

On Southern’s Q1 earnings call, Tucker said that the company is aiming for its funds from operations (FFO) to rise from 14% of its overall debt into the 17% range by the latter half of its five-year plan. Combined with incremental equity issuances to raise more cash, this should allow the company to fund its growth while keeping debt levels down.

At the end of the day, Southern is a utility with a long track record of predictable earnings and dividend payments. And it has a solid management team that knows what it needs to do to drive further growth for the business.

However, considering its struggles to maintain consistent cash inflows, it’s still not quite a bargain at today’s prices – especially with other energy producers trading at more attractive valuations, as I’ve covered in recent weeks.

The Value Meter rates this one as “Appropriately Valued.”

The Value Meter

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