Southern Company (SO)

Conclusion

Southern Company is a US regulated electric utility. It sells electricity to retail and wholesale customers, develops and operates generation and battery storage, and distributes natural gas in Illinois, Georgia, Virginia and Tennessee. At 93.57 USD per share, the market capitalisation is 108.94 billion USD.

The verdict is overvalued. The price-to-earnings ratio is 21.8 against its ten-year median of 21.1, a premium of 3.4%. The enterprise value to EBITDA ratio is 12.1 against a median of 12.3, a discount of 1.2%. The fair value band runs from 48.99 to 73.49 USD with a midpoint of 61.24 USD, giving a margin of safety of -34.6%. The discounted cash flow gives 36.27 USD per share at a discount rate of 8.9%, and the fair value from historical multiples is 86.22 USD. The reverse DCF implies revenue growth of 18.1% a year, while revenue grew at a 5-year compound rate of 7.7%.

The case rests on strong margins: an operating margin of 24.7% and a net margin of 16.0%. The weakest numbers are the Altman Z-score of 1.04, net debt to EBITDA of 4.9x, interest coverage of 2.6x, and a five-year free cash flow conversion of -34.0%. Leverage is the main risk to the case.

Financial health

Financial strength is red, held back by the Altman Z-score, net debt to EBITDA and interest coverage, while the current ratio is neutral. The current ratio is 0.84 and the quick ratio is 0.46. Net debt to EBITDA is 4.9x, debt to equity is 1.80x and interest coverage is 2.6x. The Altman Z-score is 1.04, in the distress zone. The Altman model was designed for manufacturers, so this reading is only a rough guide for a regulated utility. Insolvency risk is low, about 1.1% by the estimate of the Ohlson model over one to two years, based on figures as of 2025-12-31.

Earnings quality

Earnings quality is red, because free cash flow conversion is weak, although the accrual ratio and the share count trend are neutral. Free cash flow conversion is 44.6% on a trailing basis but -34.0% over five years. The accrual ratio is -3.6%. Stock-based compensation is 0.5% of revenue, and free cash flow after it is 2.08 billion USD. The share count has grown at a 5-year compound rate of 0.95%, so the company has not been buying back shares. The Piotroski score is 4 out of 9. The Beneish M-score is not available. The company beat earnings estimates in 6 of the last 8 quarters, with an average surprise of 4.9%. Current-year estimates were revised up 0.9% over 90 days, with 7 upgrades and 2 downgrades in the last 30 days. Next-year estimates were revised up 0.2%, with 2 upgrades and 5 downgrades, and next-year earnings growth is expected at 6.6%.

Profitability

Profitability is green. Gross margin is 49.7% against a ten-year median of 43.7%, operating margin 24.7% against 22.8%, and net margin 16.0% against 13.6%. Operating margin stability is 0.30. ROIC is 6.2% against a WACC of 6.9%, a ROIC minus WACC of -0.7%, which is neutral. The five-year median ROIC is 5.95%. The DuPont split shows that leverage plays a large role in the return on equity. Net margin is 14.7%, asset turnover is 0.19x and the equity multiplier is 4.32x, which together give a trailing return on equity of 11.9%. Without the high equity multiplier, the return on equity would be much lower.

Growth

Growth is yellow. Revenue compound growth is 0.3% over three years, 7.7% over five years and 5.4% over ten years. Earnings per share grew at 6.2% over three years, 5.7% over five years and 4.0% over ten years. Revenue grew in 7 of the last 10 years. Recent revenue growth has been weak, with a three-year rate of 0.3%, so the five-year figure depends on earlier years. Next-year earnings growth is expected at 6.6%, which is consistent with the mid-single-digit long-run rate.

Valuation

Valuation is red. The price-to-earnings ratio is 21.8 against a ten-year median of 21.1, a premium of 3.4%. Enterprise value to EBITDA is 12.1 against 12.3, a discount of 1.2%. The price-to-sales ratio is 3.49 against a median of 3.03, a premium of 15.3%, and the price-to-book ratio is 2.59 against 2.27, a premium of 14.2%. The price-to-free-cash-flow ratio is 48.9, but only one historical data point is available. The discounted cash flow gives 36.27 USD per share at a discount rate of 8.9%, with a 2.5% terminal growth rate. About 57% of its value comes from the terminal value. The fair value band is 48.99 to 73.49 USD, with a midpoint of 61.24 USD. The fair value from historical multiples is 86.22 USD. The reverse DCF implies 18.1% growth, against 7.7% revenue growth over five years. The dividend yield is 2.9%, the forward yield is 3.3%, and the payout is 141.8% of free cash flow, so the dividend is not covered by free cash flow.

Risks

Leverage is the main risk. An Altman Z-score of 1.04 and net debt to EBITDA of 4.9x leave little room for an earnings shortfall. Interest coverage of 2.6x means that a fall in operating profit or a rise in interest costs would squeeze earnings quickly. Free cash flow conversion of -34.0% over five years means reported earnings have not reliably turned into cash. The dividend payout of 141.8% of free cash flow is not covered by cash generation. The Beneish M-score is not available. This analysis has no debt maturity schedule and no revenue split by segment, so refinancing risk and the mix of earnings across businesses cannot be assessed. The discounted cash flow and fair value band rest on fixed assumptions, so they indicate order of magnitude rather than a price target.