Sempra Energy (SRE)

Conclusion

Sempra Energy is a regulated utility group in the United States and Mexico, operating through Sempra California, Sempra Texas Utilities and Sempra Infrastructure. At a price of 78.77 USD on 2026-11-09, its market capitalisation is 51.5 billion USD.

The verdict is fair. The fair value band runs from 67.26 to 100.89 USD with a midpoint of 84.07 USD, giving a margin of safety of 6.7% at this price. Against their own ten-year medians, the price-to-earnings ratio is 16.8 against 21.2 (a premium of -20.6%), and enterprise value to EBITDA is 14.3 against 14.0 (a premium of 2.1%). The discounted cash flow value and the reverse DCF implied growth are not available, because free cash flow is negative. Revenue grew at 3.9% a year over five years, while earnings per share fell 16.0% a year over the same period.

Three numbers support the case: a current ratio of 1.61, an operating margin of 25.6% against a ten-year median of 22.3%, and a margin of safety of 6.7%. Three weaken it: net debt to EBITDA of 6.03, interest coverage of 2.58, and free cash flow conversion of -1.59 on a trailing twelve-month basis. Return on invested capital of 3.9% also sits below the weighted average cost of capital of 6.7%.

Financial health

The colour is red, because the bad readings outweigh the good ones: the net debt to EBITDA ratio of 6.03 and the interest coverage of 2.58 are weak, and the Altman Z-score of 0.98 sits in the distress zone. Only the current ratio of 1.61 is assessed as good. The quick ratio is 0.09 and debt to equity is 1.12. The Altman model was designed for manufacturers, so its distress reading is a weak guide for a utility. Insolvency risk: low, about 0.5% by the estimate of the Ohlson model over one to two years. The company's debt sits at 6.03 times EBITDA, so the balance sheet depends on steady regulated cash flows and continued access to refinancing.

Earnings quality

The colour is red, because free cash flow conversion is negative: -1.59 on a trailing twelve-month basis and -1.51 averaged over five years. Free cash flow after stock-based compensation is -4.97 billion USD. Stock-based compensation is small at 0.8% of revenue, and the accrual ratio is -0.03. The share count has grown by 2.2% a year over five years, so there have been no net buybacks. The Piotroski score is 6 out of 9. The Beneish M-score is not available. Sempra beat earnings expectations in 6 of the last 8 quarters, with an average surprise of 9.6%. Current-year estimates rose slightly over 90 days (1.0%), while next-year estimates fell by 0.3%, with four downgrades in the last 30 days against two upgrades.

Profitability

The colour is yellow: margins are good, but returns on capital are not. The gross margin is 39.0% against a ten-year median of 27.0%, the operating margin is 25.6% against 22.3%, and the net margin is 22.5% against 13.6%. Operating margin has been stable, with a stability reading of 0.13. However, return on invested capital is 3.9% against a weighted average cost of capital of 6.7%, giving a return on invested capital minus cost of capital value of -2.7%, which means the company is not earning its cost of capital. Return on equity is 9.2%. The DuPont split shows the gap: a net margin of 13.4%, an asset turnover of 0.12 and an equity multiplier of 3.51. Leverage, not operating efficiency, is what lifts return on equity.

Growth

The colour is yellow, since revenue growth is modest and earnings growth has weakened. Revenue compounded at -4.1% over three years, 3.9% over five years and 3.0% over ten years. Revenue grew in 8 of the 10 comparable years. Earnings per share compounded at -5.9% over three years, -16.0% over five years and 0.5% over ten years, so the recent earnings trend is clearly negative. Analysts expect next-year earnings growth of 7.0%, but this is a forecast, not a delivered result. Against a five-year revenue record of 3.9%, that forecast is a considerable step up in earnings growth.

Valuation

The colour is yellow: the verdict is fair, with a margin of safety of 6.7%. The price-to-earnings ratio of 16.8 is 20.6% below its ten-year median of 21.2, while enterprise value to EBITDA of 14.3 is 2.1% above its median of 14.0. The price-to-sales ratio of 3.79 is 21.2% above its median of 3.12, and the price-to-book ratio of 1.55 is 14.6% below its median of 1.81. A price-to-free-cash-flow median is not available because the data has no points for it, and the free cash flow yield is -9.4%. The discounted cash flow value and its discount rate of 8.9% are not available in the data, and so is the reverse DCF implied growth. The fair value from historical multiples is 84.07 USD. The fair value band is an order of magnitude based on fixed assumptions, not a price target. The dividend yield is 3.3%, but free cash flow is negative, so the dividend is not covered by free cash flow.

Risks

The main risk is leverage. A net debt to EBITDA of 6.03 and an interest coverage of 2.58 leave little room if borrowing costs rise or earnings fall. Negative free cash flow means the company relies on external funding to pay for its investment and its dividend. Return on invested capital below the cost of capital means that growth adds little value until returns improve. The Altman distress reading would matter more for a company that is not a utility, but the dividend and debt costs are still exposed. The analysis has limits: the data does not include a debt maturity schedule or revenue by segment, so refinancing timing and the contribution of each division cannot be judged. The discounted cash flow value, the reverse DCF and the Beneish M-score are not available.