Using the Dividend Discount Model, WEC Energy Group fair value estimate is US$99.67
WEC Energy Group's US$82.03 share price indicates it is trading at similar levels as its fair value estimate
Analyst price target for WEC is US$87.70 which is 12% below our fair value estimate
How far off is WEC Energy Group, Inc. (NYSE:WEC) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
The Calculation
As WEC Energy Group operates in the integrated utilities sector, we need to calculate the intrinsic value slightly differently. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We then discount this figure to today's value at a cost of equity of 6.1%. Relative to the current share price of US$82.0, the company appears about fair value at a 18% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= US$3.7 / (6.1% – 2.4%)
= US$99.7
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at WEC Energy Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.1%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for WEC Energy Group
Strength
Earnings growth over the past year exceeded its 5-year average.
Debt is well covered by earnings.
Balance sheet summary for WEC.
Weakness
Earnings growth over the past year underperformed the Integrated Utilities industry.
Dividend is low compared to the top 25% of dividend payers in the Integrated Utilities market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Good value based on P/E ratio and estimated fair value.
Threat
Debt is not well covered by operating cash flow.
Dividends are not covered by cash flow.
Annual earnings are forecast to grow slower than the American market.
Is WEC well equipped to handle threats?
Looking Ahead:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For WEC Energy Group, we've compiled three important items you should consider:
Risks: Case in point, we've spotted 2 warning signs for WEC Energy Group you should be aware of, and 1 of them shouldn't be ignored.
Future Earnings: How does WEC's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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
主要见解
使用股息贴现模型,WEC Energy Group 的公允价值估计为99.67美元。
WEC Energy Group的82.03美元股价表明其正以公允价值估计相似的水平交易。
WEC 的分析师目标价为87.70美元,低于我们的公允价值估计12%。
WEC Energy Group, Inc. (NYSE:WEC) 与其内在价值相差多远?使用最新的财务数据,我们将探讨是否该股票以未来现金流为基础,通过贴现法进行估价。在你认为你无法理解之前,请继续阅读!它实际上比你想象的要简单得多。
由于WEC Energy Group处于综合公用事业板块,我们需要稍微不同的计算方法来计算其内在价值。而不是使用难以估计且往往在此行业中分析师不会报告的自由现金流量,我们使用每股股息付款。除非公司将大部分自由现金流量作为分红派息,否则此方法通常会低估股票的价值。我们采用了“戈登增长模型”,假设股息付款将永远以可持续增长率增加,且预计股息增长年均增长率为10年政府债券收益率的5年平均值2.4%。然后我们以6.1%的权益成本来贴现这个数字到今天的价值。相对于当前82.0美元的股价,公司似乎以大约公允价值交易,比股票现价低18%。任何计算中的假设都对估值产生重要影响,因此最好将其视为粗略估计,而非精确到最后一分钱。
每股股息 = 期望股息 / (折现率-永久增长率)
= 3.7美元 / (6.1% – 2.4%)
= 99.7美元
假设
上述计算非常依赖于两个假设,一个是折现率,另一个是现金流。你无需同意这些输入,我建议你重新进行计算并进行调整。贴现现金流法也没有考虑行业的可能循环性,或公司未来的资本需求,因此它不能完全反映公司的潜在表现。因为我们正在考虑成为WEC Energy Group的潜在股东,所以使用权益成本作为折现率,而非资本成本或加权平均资本成本(WACC)。在这个计算中,我们使用了6.1%,这是基于0.800的杠杆贝塔计算出的。贝塔是股票相对于整个市场波动性的一种度量。我们从全球可比公司的业内平均贝塔中获得贝塔,强制范围在0.8和2.0之间,这是一个稳定企业的合理范围。
WEC Energy Group 的 SWOT 分析
优势
过去一年的盈利增长超过了其5年的平均水平
债务被收益覆盖良好。
WEC的资产负债表摘要。
弱点
过去一年的收益增长表现低于公用股行业板块。
与综合公用事业市场前25%的股息支付公司相比,股息较低。
机会
预计未来3年的年度收益将增长。
基于市盈率和预估公平价值,出现良好的价值。
威胁
运营现金流无法很好地覆盖债务。
股息不被现金流覆盖。
预计年度收益增长速度将慢于美国市场。
WEC是否有足够的能力应对威胁?
展望未来:
尽管公司的估值很重要,但理想情况下,它不应该是你为公司深入分析进行的唯一一项。DCF 模型并不是一种完美的股票估值工具。最好是应用不同的情况和假设,并查看它们将如何影响公司的估值。例如,如果终值增长率略有调整,它可能会极大地改变整体结果。对于WEC Energy Group,我们编制了三件重要的事项,请务必予以考虑:
风险:揭示的事实是,我们发现WEC Energy Group存在两个警示标志,你应该注意其中的一个。