Public Service Enterprise Group Inc (PEG)

Conclusion

Public Service Enterprise Group is a US utility based in Newark, New Jersey. Its PSE&G segment transmits and distributes electricity and natural gas, and its PSEG Power segment runs nuclear generation. At 75.03 USD per share, the market capitalisation is 37.4 billion USD and the enterprise value is 62.3 billion USD.

The verdict is overvalued. The fair value band runs from 47.27 to 70.90 USD with a midpoint of 59.08 USD, giving a margin of safety of -21.3% at the current price. The DCF gives 47.25 USD per share, and the fair value from historical multiples is 70.92 USD. Today's EV/EBITDA of 15.1x sits 27.6% above its ten-year median, and the P/E of 21.2x sits 3.9% above its median. The reverse DCF implies 10.4% annual growth, while revenue grew 4.9% a year over five years and earnings per share only 2.3%.

What holds the case up is a stable operating margin of 21.6% against a median of 21.1%, and a Piotroski score of 7 out of 9. The company beat earnings estimates in 6 of the last 8 quarters. What would break it is net debt to EBITDA of 6.06x, interest coverage of 2.6x, and a free cash flow conversion over five years of -42.6%.

Financial health

Financial strength is red, pulled down by three measures assessed as bad: net debt to EBITDA of 6.06x, interest coverage of 2.6x and an Altman Z-score of 1.20. The current ratio of 1.01 is neutral, and the quick ratio is 0.65. Debt to equity stands at 1.48. The Altman model was designed for manufacturers, and this company is a utility, so its distress reading should be read with that in mind. Insolvency risk is low, about 1.1% by the estimate of the Ohlson model over one to two years. Debt has grown only 2.0% a year over five years, in line with revenue.

Earnings quality

Earnings quality is yellow: the Piotroski score of 7 out of 9 and the Beneish M-score of -2.62, which is read as unlikely to indicate manipulation, are good. Free cash flow conversion is 72.8% on a trailing basis but -42.6% on a five-year basis, which is bad. The accrual ratio is -0.5%, a good sign. The share count fell at a compound rate of 0.2% over five years, a sign of buybacks. Stock-based compensation is not available, so its share of revenue cannot be shown. Six of the last eight earnings surprises were beats, with an average surprise of 4.5%. Estimate revisions for next year have been negative: five downward revisions against two upward in the last 30 days.

Profitability

Profitability is green, supported by a gross margin of 59.2% against a ten-year median of 35.6%, and an operating margin of 21.6% close to its median of 21.1%. The net margin of 14.3% is below its median of 17.0%. The return on invested capital is 5.8% against a weighted cost of capital of 7.0%, a gap of -1.2% and neutral. The five-year median return on invested capital is 6.1%. The return on equity of 10.2% is lifted by leverage: the equity multiplier is 3.39, and asset turnover is only 0.21.

Growth

Growth is yellow. Revenue compounded at 7.5% over three years, 4.9% over five and 1.6% over ten. Earnings per share compounded at 27.0% over three years, but only 2.3% over five and 2.5% over ten, so the recent surge is a short-term effect. Revenue grew in 7 of the last 10 years. Analysts expect next year's earnings per share to grow 6.3%, a neutral outlook.

Valuation

Valuation is red. The verdict is overvalued, with a margin of safety of -21.3% at a price of 75.03 USD. Against their ten-year medians, the P/E of 21.2x is 3.9% above its median of 20.4x, the EV/EBITDA of 15.1x is 27.6% above 11.9x, the P/S of 3.03x is 1.3% above 2.99x, and the P/B of 2.15x is 7.7% above 2.00x. The DCF gives 47.25 USD per share, using a discount rate of 8.9% and a terminal growth of 2.5%. The fair value from historical multiples is 70.92 USD. The fair value band is an order of magnitude built on fixed assumptions, not a price target. The dividend yield is 3.5%, and the dividend payout is 102.4% of free cash flow, which leaves little room for error.

Risks

Net debt to EBITDA of 6.06x and interest coverage of 2.6x mean that a fall in earnings or a rise in borrowing costs would leave little cushion for interest payments. A five-year free cash flow conversion of -42.6% shows that reported earnings have not reliably turned into cash. Negative estimate revisions for next year could weigh on the share price if confirmed. Stock-based compensation is not available. This analysis does not include a debt maturity schedule or revenue by segment, so refinancing risk and the mix of regulated and nuclear earnings cannot be assessed.