DTE Energy's estimated fair value is US$124 based on Dividend Discount Model
DTE Energy's US$113 share price indicates it is trading at similar levels as its fair value estimate
Our fair value estimate is 3.5% higher than DTE Energy's analyst price target of US$120
In this article we are going to estimate the intrinsic value of DTE Energy Company (NYSE:DTE) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
The Model
As DTE Energy operates in the integrated utilities sector, we need to calculate the intrinsic value slightly differently. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. 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$113, the company appears about fair value at a 9.4% 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$4.6 / (6.1% – 2.4%)
= US$124
NYSE:DTE Discounted Cash Flow June 25th 2024
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 DTE 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 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 DTE Energy
Strength
Earnings growth over the past year exceeded the 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.
Paying a dividend but company has no free cash flows.
Annual earnings are forecast to grow slower than the American market.
Is DTE well equipped to handle threats?
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For DTE Energy, we've compiled three further factors you should explore:
Risks: You should be aware of the 3 warning signs for DTE Energy (1 is a bit concerning!) we've uncovered before considering an investment in the company.
Future Earnings: How does DTE'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.
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
基于分红折现模型,DTE Energy的预估公允价值为124美元。
DTE Energy的113美元股价表明其交易水平与公允价值估计相似。
我们的公允价值估计比DTE Energy分析师价格目标120美元高3.5%。
在本文中,我们将通过估算公司未来的现金流,并将其折现到现值来估算DTE Energy Company (NYSE:DTE)的内在价值。这将使用折现现金流量(DCF)模型来完成。不要被术语吓倒,它背后的数学实际上相当简单。
由于DTE Energy属于综合公用事业板块,我们需要稍微不同的方式计算其内在价值。在这种方法中,我们使用每股股息(dividends per share, DPS),因为自由现金流很难估算且通常不会被分析师报告。除非公司将大部分自由现金流作为股息支付,否则此方法通常会低估股票的价值。我们使用'高登增长模型',它简单地假设股息支付将永远以可持续的增长率增加。预计年增长率等于10年期政府债券收益率的5年平均值2.4%。然后我们以6.1%的权益成本将该数字折现到今天的价值。相对于当前的股价113美元,该公司看起来约合公平价值,当前股价的折扣率为9.4%。任何计算中的假设都会对估值产生很大影响,因此最好将其视为大致估算,而不是准确到最后一分钱。