Is It Too Late To Reassess Southern (SO) After Its Strong Multi Year Share Price Run?

• If you are wondering whether Southern's current share price still offers value or if most of the opportunity is already reflected, you are in the right place.
• With the stock last closing at US$97.45 and returns of 2.0% over 7 days, 0.0% over 30 days, 11.8% year to date, 13.2% over 1 year, 49.9% over 3 years and 87.2% over 5 years, many investors are reassessing what is already priced in.
• Recent company news has focused on its position in the US utilities sector and how it is managing long term infrastructure needs and regulatory expectations. This context helps explain why the market has been willing to re-rate the shares over multi year periods while still questioning how much further value there may be.
• Southern currently records a value score of 4 out of 6, and the rest of this article will walk through what different valuation approaches say about that score, before finishing with a broader way to think about what the stock is really worth.

Find out why Southern's 13.2% return over the last year is lagging behind its peers.

Approach 1: Southern Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a business might be worth by projecting its future cash flows and then discounting them back to today using a required rate of return. It is essentially asking what all those future cash flows are worth in present day dollars.

For Southern, the model used is a 2 Stage Free Cash Flow to Equity approach, based on free cash flow to equity expressed in dollars. The latest twelve month free cash flow is a loss of about $1.49b. From there, analysts provide near term estimates, and Simply Wall St extends those with longer term projections. In this model, the ten year path runs from $593m in 2026 up to about $12.54b in 2035, with each year discounted back to today.

Adding those discounted cash flows together, plus a terminal value, gives an estimated intrinsic value of about $203.82 per share. Compared with the recent share price of US$97.45, this model implies Southern is about 52.2% undervalued based on these assumptions.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Southern is undervalued by 52.2%. Track this in your watchlist or portfolio, or discover 58 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Southern.

Approach 2: Southern Price vs Earnings

For a profitable company like Southern, the P/E ratio is a useful way to think about valuation because it links what you pay for each share directly to the earnings that support that share. Higher growth expectations and lower perceived risk usually go with a higher, or more generous, P/E ratio, while slower expected growth or higher risk tend to justify a lower multiple.

Southern currently trades on a P/E of 25.13x. That sits above the Electric Utilities industry average of 21.87x, but below the peer group average of 28.03x. On the surface, that places Southern roughly in the middle of the pack, not at either extreme compared with similar companies.

Simply Wall St also calculates a Fair Ratio of 26.44x for Southern. This is a proprietary estimate of what the P/E might be given factors such as earnings growth, industry, profit margin, market cap and company specific risks. Because it blends these elements together, it gives a more tailored reference point than simply lining the stock up against industry and peer averages. With the current P/E of 25.13x only modestly below the Fair Ratio of 26.44x, the multiple suggests the shares are slightly undervalued on this measure.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Start investing in legacies, not executives. Discover our 20 top founder-led companies.

Upgrade Your Decision Making: Choose your Southern Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Think of a Narrative as your own clear story for Southern that links what you believe about its future revenue, earnings and margins to a forecast and fair value on Simply Wall St’s Community page, where millions of investors share views. You can compare that fair value with today’s price to help decide if the stock looks attractive to you. You can also see how your view lines up with others who might, for example, build a more optimistic Southern Narrative closer to the US$112 fair value or a more cautious one nearer US$81, and have that Narrative automatically refresh as new earnings, news or regulatory updates come through.

Do you think there's more to the story for Southern? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com