Pinnacle West Capital's estimated fair value is US$98.96 based on Dividend Discount Model
Current share price of US$72.97 suggests Pinnacle West Capital is potentially 26% undervalued
Analyst price target for PNW is US$75.92 which is 23% below our fair value estimate
In this article we are going to estimate the intrinsic value of Pinnacle West Capital Corporation (NYSE:PNW) by taking the expected future cash flows and discounting them to today's 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.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.
Is Pinnacle West Capital Fairly Valued?
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. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. 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 (2.3%). The expected dividend per share is then discounted to today's value at a cost of equity of 6.0%. Compared to the current share price of US$73.0, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= US$3.6 / (6.0% – 2.3%)
= US$99.0
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 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 6.0%, 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.
See PNW's revenue and earnings trends.
Weakness
Interest payments on debt are not well covered.
Dividend is low compared to the top 25% of dividend payers in the Electric Utilities market.
Shareholders have been diluted in the past year.
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?
Moving On:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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. What is the reason for the share price sitting below the intrinsic value? For Pinnacle West Capital, we've compiled three essential factors you should further examine:
Risks: Be aware that Pinnacle West Capital is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
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.
由於Pinnacle West Capital在電力公用事業領域開展業務,我們需要以略有不同的方式計算內在價值。沒有使用自由現金流,因爲自由現金流難以估計,而且該行業的分析師通常不報告,而是使用每股股息(DPS)支付。這通常低估了股票的價值,但與競爭對手相比,它仍然可以很好地發揮作用。我們使用戈登增長模型,該模型假設股息將以可以持續的速度永久增長。出於多種原因,使用了非常保守的增長率,不能超過公司的國內生產總值(GDP)。在本例中,我們使用了10年期國債收益率的5年平均值(2.3%)。然後,每股預期股息折現爲今天的價值,股本成本爲6.0%。與目前的73.0美元股價相比,該公司的估值似乎略有低估,與目前股價相比折扣了26%。但是,估值是不精確的工具,就像望遠鏡一樣——移動幾度,最終進入另一個星系。請記住這一點。
每股價值 = 每股預期股息/(折現率-永久增長率)
= 3.6 美元/(6.0% — 2.3%)
= 99.0 美元
假設
現在,貼現現金流的最重要輸入是貼現率,當然還有實際現金流。你不必同意這些輸入,我建議你自己重做計算然後試一試。DCF也沒有考慮一個行業可能的週期性,也沒有考慮公司未來的資本需求,因此它沒有全面反映公司的潛在表現。鑑於我們將Pinnacle West Capital視爲潛在股東,因此使用權益成本作爲貼現率,而不是構成債務的資本成本(或加權平均資本成本,WACC)。在此計算中,我們使用了6.0%,這是基於0.800的槓桿測試版。Beta是衡量股票與整個市場相比波動性的指標。我們的測試版來自全球可比公司的行業平均貝塔值,設定在0.8到2.0之間,這是一個穩定的業務的合理範圍。
Pinnacle West Capital 的 SWOT 分析
力量
過去一年的收益增長超過了該行業。
查看 PNW 的收入和收益趨勢。
弱點
債務的利息支付未得到充分保障。
與電力公用事業市場前25%的股息支付者相比,股息很低。
在過去的一年中,股東被稀釋了。
機會
預計未來三年的年收入將增長。
根據市盈率和估計的公允價值,物有所值。
威脅
運營現金流無法很好地覆蓋債務。
支付股息,但公司沒有自由現金流。
預計年收益的增長速度將低於美國市場。
PNW 有足夠的能力應對威脅嗎?
繼續前進:
雖然重要,但DCF的計算只是公司需要評估的衆多因素之一。DCF模型並不是投資估值的萬能藥。取而代之的是,DCF模型的最佳用途是測試某些假設和理論,看看它們是否會導致公司被低估或高估。如果一家公司以不同的速度增長,或者其股本成本或無風險利率急劇變化,則產出可能會大不相同。股價低於內在價值的原因是什麼?對於Pinnacle West Capital,我們整理了三個基本因素,您應該進一步研究:
風險:請注意,Pinnacle West Capital在我們的投資分析中顯示了3個警告信號,其中一個不容忽視...