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
主要見解
利用股息折現模型,Pinnacle West Capital的公允價值估計爲111美元。
目前的88.07美元股價表明Pinnacle West Capital可能被低估了21%。
分析師爲PNW定的80.63美元的價格目標比我們的公允價值估計低27%。
今天我們會運用折現現金流模型(DCF)進行分析,估算Pinnacle West Capital Corporation (NYSE:PNW) 的內在價值。DCF模型雖然看起來很高深,但是隻需稍微掌握一下,即可理解。我們將使用預期未來現金流,並將它們折現至現價。
由於Pinnacle West Capital是一家從事電力公用事業的公司,我們需要用不同的方式計算其內在價值。我們採用的是戈登增長模型,並使用每股股息(DPS)支付來代替自由現金流進行計算,因爲在業內很難估算自由現金流,也很少被分析師報告。雖然這通常會低估股票價值,但仍然可以與競爭對手進行比較。這種模型假設股息支付將會以可持續的增長率不斷增加,而我們使用的增長率非常保守,不能超過公司國內生產總值(GDP)。在這種情況下,我們將使用10年期政府債券收益率5年均值(2.5%)作爲增長率。隨後,預期每股股息以5.8%的權益成本折現至今天的價值。與目前的股價88.1美元相比,該公司似乎略有低估,折扣達21%。請記住,這只是一個大致的估值,像任何複雜的公式一樣,請注意垃圾進,垃圾出的問題。
每股股息 = 預期每股股息 / (折現率-永久增長率)
= 3.7美元/(5.8%–2.5%)
= 111美元
重要假設
需要指出的是,現金流折現模型的最重要的輸入是折現率和實際現金流。如果您不同意這些結果,可以自己進行計算並調整假設。DCF模型也沒有考慮一個行業可能的週期性,或者公司未來的資本需求,因此它並沒有給出公司潛在表現的全部圖片。鑑於我們正在考慮Pinnacle West Capital作爲潛在股東,所以使用的是權益成本作爲折現率,而不是成本資本(或加權平均成本資本,WACC),後者考慮了債務因素。在這個計算中,我們使用了5.8%,這基於帶槓桿β值爲0.800。β是股票的波動率,與整個市場相比較。我們從全球可比公司的行業平均β值中得到我們的β值,限定於0.8到2.0之間,這是一個穩定業務的合理範圍。
Pinnacle West Capital SWOT分析
優勢
過去一年的收益增長超過了行業板塊。
查看PNW的營收和收益趨勢。
弱點
債務利息支付能力不太好。
股息與電力公用事業市場前25%的股息支付者相比較低。
機會
預計未來3年的年度收益將增長。
基於市盈率和預估公平價值,出現良好的價值。
威脅
運營現金流無法很好地覆蓋債務。
雖然發放股息,但公司並沒有自由現金流。
預計年度收益增長速度將慢於美國市場。
PNW是否有足夠的能力應對威脅?
下一步:
儘管公司的估值很重要,但在研究公司時,它不應該是您僅僅關注的唯一指標。DCF模型並不是投資估值的全部和終極目標。相反,我們應該將其視爲“股票被低估或高估需要假設哪些因素成立”的指南。例如,公司權益成本或風險免費利率的變化可能會顯著影響估值。我們能否想出這家公司的股票爲什麼會被低估?對於Pinnacle West Capital,我們還列舉了三個您應該關注的方面:
風險:例如,我們已經發現了Pinnacle West Capital的兩個警告信號(不能忽視的是1),您應該知道。