Using the Dividend Discount Model, Pinnacle West Capital fair value estimate is US$111
Current share price of US$88.07 suggests Pinnacle West Capital is potentially 21% undervalued
The US$80.63 analyst price target for PNW is 27% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Pinnacle West Capital Corporation (NYSE:PNW) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
What's The Estimated Valuation?
As Pinnacle West Capital operates in the electric 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. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (2.5%). The expected dividend per share is then discounted to today's value at a cost of equity of 5.8%. Compared to the current share price of US$88.1, the company appears a touch undervalued at a 21% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= US$3.7 / (5.8% – 2.5%)
= US$111
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Pinnacle West Capital 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 5.8%, 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 Pinnacle West Capital
Strength
Earnings growth over the past year exceeded the industry.
Dividend is low compared to the top 25% of dividend payers in the Electric 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.
Paying a dividend but company has no free cash flows.
Annual earnings are forecast to grow slower than the American market.
Is PNW well equipped to handle threats?
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Pinnacle West Capital, we've put together three further aspects you should look at:
Risks: For instance, we've identified 2 warning signs for Pinnacle West Capital (1 shouldn't be ignored) you should be aware of.
Future Earnings: How does PNW'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks 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
利用股息折现模型,Pinnacle West Capital的公允价值估计为111美元。
目前的88.07美元股价表明Pinnacle West Capital可能被低估了21%。
分析师为PNW定的80.63美元的价格目标比我们的公允价值估计低27%。
今天我们会运用折现现金流模型(DCF)进行分析,估算Pinnacle West Capital Corporation (NYSE:PNW) 的内在价值。DCF模型虽然看起来很高深,但是只需稍微掌握一下,即可理解。我们将使用预期未来现金流,并将它们折现至现价。
由于Pinnacle West Capital是一家从事电力公用事业的公司,我们需要用不同的方式计算其内在价值。我们采用的是戈登增长模型,并使用每股股息(DPS)支付来代替自由现金流进行计算,因为在业内很难估算自由现金流,也很少被分析师报告。虽然这通常会低估股票价值,但仍然可以与竞争对手进行比较。这种模型假设股息支付将会以可持续的增长率不断增加,而我们使用的增长率非常保守,不能超过公司国内生产总值(GDP)。在这种情况下,我们将使用10年期政府债券收益率5年均值(2.5%)作为增长率。随后,预期每股股息以5.8%的权益成本折现至今天的价值。与目前的股价88.1美元相比,该公司似乎略有低估,折扣达21%。请记住,这只是一个大致的估值,像任何复杂的公式一样,请注意垃圾进,垃圾出的问题。
每股股息 = 预期每股股息 / (折现率-永久增长率)
= 3.7美元/(5.8%–2.5%)
= 111美元
重要假设
需要指出的是,现金流折现模型的最重要的输入是折现率和实际现金流。如果您不同意这些结果,可以自己进行计算并调整假设。DCF模型也没有考虑一个行业可能的周期性,或者公司未来的资本需求,因此它并没有给出公司潜在表现的全部图片。鉴于我们正在考虑Pinnacle West Capital作为潜在股东,所以使用的是权益成本作为折现率,而不是成本资本(或加权平均成本资本,WACC),后者考虑了债务因素。在这个计算中,我们使用了5.8%,这基于带杠杆β值为0.800。β是股票的波动率,与整个市场相比较。我们从全球可比公司的行业平均β值中得到我们的β值,限定于0.8到2.0之间,这是一个稳定业务的合理范围。
Pinnacle West Capital SWOT分析
优势
过去一年的收益增长超过了行业板块。
查看PNW的营收和收益趋势。
弱点
债务利息支付能力不太好。
股息与电力公用事业市场前25%的股息支付者相比较低。
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。
虽然发放股息,但公司并没有自由现金流。
预计年度收益增长速度将慢于美国市场。
PNW是否有足够的能力应对威胁?
下一步:
尽管公司的估值很重要,但在研究公司时,它不应该是您仅仅关注的唯一指标。DCF模型并不是投资估值的全部和终极目标。相反,我们应该将其视为“股票被低估或高估需要假设哪些因素成立”的指南。例如,公司权益成本或风险免费利率的变化可能会显著影响估值。我们能否想出这家公司的股票为什么会被低估?对于Pinnacle West Capital,我们还列举了三个您应该关注的方面:
风险:例如,我们已经发现了Pinnacle West Capital的两个警告信号(不能忽视的是1),您应该知道。