National Grid’s (LSE: NG) share price is trading within a whisker of its 23 April 12-month traded high of £11.03. Its current level marks a 20% rise from its 14 January one-year traded low of £9.09.
That said, I believe the stock could still hold significant value, based on my experience as a former senior investment bank trader and longtime private investor.
So, I took a deep look at the core business and ran the key numbers to see what I could find.
The core business outlook
National Grid retains the monopoly for electricity transmission in England and gas transmission across the UK. It provides the same energy needs in the northeastern US, with a focus on New York and Massachusetts.
It is due to release its H1 fiscal-year 2025/26 results on 6 November, but on 2 October it issued a pre-results update.
As with many of these things, it did not go into great detail, but the overview looked positive. In broad terms, it said H1 performance has been in line with previous forecasts.
One of these is for a compound annual growth rate (CAGR) in assets of about 10% to fiscal-year 2028/29. Another is for earnings per share (EPS) CAGR of 6%-8% by the same point.
And the final one is for an EPS baseline of 73.3p. The company expects underlying EPS growth to be stronger in the second half of this fiscal year.
The firm additionally highlighted that the US business is likely to make a higher contribution to operating profit in H1 than in the same period last year.
As a point of reference, its full fiscal year 2024/25 results showed profit before tax rising 20% to £3.65bn. EPS rose 8% to 60p.
A key risk for the firm remains the heavy level of government-mandated investment in power infrastructure. National Grid reiterated in the update that total cumulative capital investment of around £60bn from 2024/25 to 2028/29 would continue.
That said, consensus analysts’ forecasts are that its earnings will increase by 11% each year to end-2028/29. These are the driving force for any firm’s share price and dividends long term.
Is the stock undervalued?
The best way I have found to determine any stock’s true worth is the discounted cash flow (DCF) method. This pinpoints the price at which any share should trade, based on underlying business fundamentals.
The DCF analysis indicates that National Grid shares currently trade 10% below their fair value at £10.95.
Therefore, their fair value is £12.17.
I do not find this price-to-value proposition enticing, as market volatility alone could account for it.
I note as well that the stock also looks overvalued on comparative stock measures to its peers. For example, National Grid’s price-to-sales ratio of 2.9 significantly exceeds its competitors’ average of 1.1, indicating substantial overvaluation. These comprise E.ON at 0.5, Engie at 0.6, Enel at 1.1, and Iberdrola at 2.4.
Given this very limited price gap to its fair value, I will not buy the shares at the moment.
I believe there are many better growth stock and dividend share prospects currently available to me.
