Constellation Energy (CEG) Valuation Check As PJM Policy Shifts Raise Regulatory Risk Concerns

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Constellation Energy (CEG) has come into focus after Trump administration proposals for the PJM power grid paired accelerated plant construction with potential price caps and earnings limits on existing assets, raising fresh questions about regulatory risk.

See our latest analysis for Constellation Energy.

The regulatory headlines and emergency auction talk have coincided with a 19.6% year to date share price decline to US$294.37 and a 19.5% 90 day share price drop. However, the 3 year total shareholder return remains very large, suggesting that recent weakness reflects a reset in risk expectations rather than a simple reversal of the longer term story.

If you are weighing how this kind of policy shock might affect other utilities and power producers, it could be a good time to scan healthcare stocks to compare more defensive earnings profiles with energy exposed names.

With CEG now down almost 20% year to date, but still carrying a rich reputation after a very large 3 year total return, are you looking at an overreaction in a quality operator, or is the market simply trimming back previously assumed growth?

Constellation Energy closed at US$294.37 with the shares trading on a P/E of 35.4x, well above several comparison points, so the market is attaching a premium to current earnings.

The P/E ratio tells you how much investors are paying today for each dollar of earnings, and it is a common way to compare utilities with relatively established profit profiles. For Constellation Energy, that 35.4x multiple sits against earnings that grew 25.8% over the past year and are forecast to grow 12% per year.

That premium multiple comes through clearly when you set it against the US Electric Utilities peer average of 20.7x and the peer group average of 21.3x. This suggests investors are paying a much higher price for Constellation Energy’s earnings than for the sector in general. It is also above the estimated fair P/E of 30.7x. Our models suggest the market could gravitate toward that level over time if sentiment cools or earnings catch up.

Explore the SWS fair ratio for Constellation Energy

Result: Price-to-Earnings of 35.4x (OVERVALUED)

However, there are clear risks, including shifting PJM auction rules and potential earnings limits on existing plants that could challenge the premium multiple investors are paying.

Find out about the key risks to this Constellation Energy narrative.

While the P/E of 35.4x screens as expensive, our DCF model tells a more balanced story, with Constellation Energy at US$294.37 trading just 0.8% below an estimated future cash flow value of US$296.68. In other words, price and cash flow assumptions are almost in sync.

That small gap leaves less obvious room for error if the new PJM rules squeeze earnings more than expected, but it also suggests the recent share price drop has already done some of the work of resetting expectations. The real question is whether you trust the earnings path that underpins those cash flows.

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Constellation Energy for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 882 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match – so you never miss a potential opportunity.

If you see the numbers differently or prefer to rely on your own work, you can test your assumptions and publish a fresh view in minutes: Do it your way.

A great starting point for your Constellation Energy research is our analysis highlighting 4 key rewards and 3 important warning signs that could impact your investment decision.

If you stop with just one idea, you might miss others that fit your style even better. Cast the net wider and let the data work for you.

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.

Companies discussed in this article include CEG.

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