With a market cap over $8 billion, Alliant Energy (LNT, Financial) supplies electricity, gas and other services in Wisconsin, Iowa and Minnesota. The company sports a strong balance sheet and has paid a steady dividend over many years. So what is the problem?
Put simply, at about $38, shares are overpriced based on the company’s own historical valuation. Why pay up for shares when they are higher than they have been in years?
To gain a more complete understanding of the Alliant Energy price-to-valuation relationship, let’s review the company from several valuation perspectives.
Price-to-sales revenue
Over time it is advantageous to buy when the price-sales (P/S) ratio is relatively low. This provides the chance for the investor to capture upside stock price gains as revenue grows.
Using a F.A.S.T. Graphs subscription allows us to visually review the data to note that the Alliant Energy price today, relative to its own revenue over the past 20 years, is relatively high.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Price-to-book value
Another valuation perspective and clue that Alliant Energy is overpriced is a review of the price-to-book (P/B) valuation relationship over time. Again, an investor would maximize the chance for total returns if he/she invests when the price is fairly low relative to book value.
Have a look at the graph below. Note that the price is fairly high compared to the historical norms for the Alliant Energy price-to-book value relationship.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Price to earnings over a 20-year history
Here’s where the data presents a compelling picture. Have a look at the graph below. Notice how the market price (black line) has closely followed Alliant Energy’s earnings growth (blue line) over the past 20 years. Until 2015. Then we begin to see the market bid Alliant Energy's price above its normal valuation.
What does this mean for investors? Over the past 20 years, Alliant Energy has had a normal price-earnings (P/E) ratio of 14.9X earnings. Today Alliant Energy is selling for over 21X earnings. Why pay such a premium for those earnings?
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
A last look: Price to earnings over the past 10 years
It’s been a different world with lower interest rates, etc., over the past 10 years so let’s see what normal valuations for Alliant Energy have been over that period.
As we see below, the normal P/E for Alliant Energy over the past 10 years has been 15.4X earnings.
Again, at today’s market price the P/E is 21.2X.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
We’ve looked at valuation from four different perspectives. If one believes the stock price reverts to normal levels over time, then one can reasonably conclude that Alliant Energy is overpriced.
What are Alliant Energy shares worth?
If shares are too expensive right now, what might they be worth? Say we apply the 10-year average PE of 15.4X to expected 2016 earnings of $1.90, shares are probably worth about $30.
With today’s price at $38, why wait around and risk a 20%-plus drop as the price returns to normalized levels?
Disclosure: While positions can change at any time, a long-time shareholder, I recently sold my Alliant Energy position.
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