Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Companhia Paranaense de Energia (ADR) (ELP), NRG Energy Inc (NRG), Atlantic Power Corp (AT): 3 Well Capitalized Utilities That Look Undervalued

Editor’s Note: This article has been amended to better reflect Atlantic Power Corp (NYSE:AT)’s debt position.

At the end of May, utility stocks were rapidly sold off following a multi-month rally as investors took profits and sought more cyclical opportunities in a rising market.

NRG Energy Inc (NYSE:NRG)

But, after this pullback, could now be the time to buy?

The majority of the utility sector still looks overvalued, as investors have been chasing valuations higher during the past few months and years in the hunt for yield. However, it appears that there are still some undervalued companies in the market.

Basically I am looking for a company that is trading for less than the value of its assets and that is profitable, well-capitalized and has a low level of debt. So, based on that brief, I have four screening criteria:

–Price-to-book ratio – ideally below one, but no more than two times

–Current ratio – equal to or greater than 1.5

–Debt-to-equity ratio – ideally below one but this is flexible; ideally interest costs should be covered at least twice by gross income

–Some earnings – the company must have generated some EPS growth during the past five years

–Dividend – the company must offer a dividend

Company number one is Companhia Paranaense de Energia (ADR) (NYSE:ELP) (COPEL), which is engaged in the distribution and sale of electricity in the state of Paran, Brazil. The company currently appears undervalued with a P/B ratio of 0.8 and a P/E ratio of 8.1.

Companhia Paranaense de Energia (ADR) (NYSE:ELP) has a current ratio of 1.8 and a debt-to-equity ratio of 18%. Over the last five years, the company has generated EPS growth of 2.5%, around 0.5% a year, and this slow rate of growth is one of the reasons behind the company’s low valuation.

That said, Companhia Paranaense de Energia (ADR) (NYSE:ELP) is expected to grow EPS 17% this year and generate a return on equity of 10%, relatively high for its sector considering the company’s 10-largest peers have an average ROE of between 7% and 9%.

Companhia Paranaense de Energia (ADR) (NYSE:ELP)’s dividend yield is 3.4%, although last year’s payout of $0.52 per share is covered just under four times by EPS.

Overall, Companhia Paranaense de Energia (ADR) (NYSE:ELP) looks cheap due to its low price-to-book ratio, low price-to-earnings ratio, strong return on equity and strong balance sheet. Additionally, with a dividend cover of nearly four times, there is plenty of scope for COPEL to raise its dividend payout.