OGE Energy's estimated fair value is US$47.44 based on 2 Stage Free Cash Flow to Equity
With US$42.78 share price, OGE Energy appears to be trading close to its estimated fair value
The US$40.73 analyst price target for OGE is 14% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of OGE Energy Corp. (NYSE:OGE) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$71.0m
US$130.0m
US$180.2m
US$230.3m
US$277.0m
US$318.4m
US$354.3m
US$385.0m
US$411.4m
US$434.4m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ 38.61%
Est @ 27.82%
Est @ 20.26%
Est @ 14.97%
Est @ 11.26%
Est @ 8.67%
Est @ 6.85%
Est @ 5.58%
Present Value ($, Millions) Discounted @ 5.9%
US$67.0
US$116
US$152
US$183
US$208
US$226
US$237
US$243
US$245
US$244
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.9b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$14b÷ ( 1 + 5.9%)10= US$7.6b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$9.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$42.8, the company appears about fair value at a 9.8% 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.
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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 OGE Energy 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 5.9%, 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 OGE Energy
Strength
No major strengths identified for OGE.
Weakness
Earnings declined over the past year.
Interest payments on debt are not well covered.
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.
Current share price is below our estimate of fair value.
Have OGE insiders been buying lately?
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 OGE 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For OGE Energy, there are three fundamental aspects you should further examine:
Risks: For example, we've discovered 2 warning signs for OGE Energy (1 can't be ignored!) that you should be aware of before investing here.
Future Earnings: How does OGE'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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.
主要见解
oge energy的估计公允价值为47.44美元,基于两阶段的自由现金流到权益
以42.78美元的股价,oge energy似乎接近其估计的公允价值
对于oge的分析师价格目标为40.73美元,比我们估计的公允价值低14%
今天我们将介绍一种估算oge energy corp.(纽交所:oge)内在价值的方法,通过将预期的未来现金流折现到今天的价值。实现这一点的一种方法是使用折现现金流(DCF)模型。虽然这看起来可能相当复杂,但实际上并没有那么困难。