Using the Dividend Discount Model, Atmos Energy fair value estimate is US$98.88
Current share price of US$116 suggests Atmos Energy is potentially trading close to its fair value
The US$127 analyst price target for ATO is 28% more than our estimate of fair value
How far off is Atmos Energy Corporation (NYSE:ATO) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present 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.
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.
What's The Estimated Valuation?
As Atmos Energy operates in the gas 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. 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%. Compared to the current share price of US$116, the company appears around fair value at the time of writing. 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 / (6.1% – 2.4%)
= US$98.9
NYSE:ATO Discounted Cash Flow June 17th 2024
The 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. 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 Atmos 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 Atmos Energy
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings and cashflows.
Balance sheet summary for ATO.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Gas Utilities market.
Shareholders have been diluted in the past year.
Opportunity
Annual revenue is forecast to grow faster than the American market.
Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
Paying a dividend but company has no free cash flows.
Annual earnings are forecast to grow slower than the American market.
See ATO's dividend history.
Looking Ahead:
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?" 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 Atmos Energy, there are three important factors you should assess:
Risks: To that end, you should be aware of the 3 warning signs we've spotted with Atmos Energy .
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ATO's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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
利用分紅貼現模型,Atmos Energy 的公允價值估算爲98.88美元。
目前的116美元的股票價格表明Atmos Energy 可能接近其公允價值。
ATO的分析師價格目標爲127美元,比我們的公允價值估計高28%。
Atmos Energy Corporation (NYSE:ATO)的內在價值有多遠?利用最近的財務數據,我們將估計公司未來的現金流,並將其貼現到現值。一種實現這一點的方法是採用折現現金流模型(DCF)模型。儘管可能看起來非常複雜,但實際上並沒有那麼複雜。我們需要計算燃氣公用事業板塊的內在價值,這與自由現金流有所不同。我們使用每股股息支付(DPS)來計算股票價值。儘管這通常會低估股票的價值,但仍可以作爲與競爭對手相比較的另一個參考。我們使用“戈登增長模型”,該模型假定股息支付將始終以持續增長率增加。預期股息增長速度等於10年期政府債券收益率的5年平均值,爲2.4%。然後我們以6.1%的權益成本將此數字折現到今天的價值。與當前的116美元的股票價格相比,在寫作本文時,公司看起來約處於公允價值附近。然而,估值工具並不精確,就像望遠鏡一樣,稍微偏轉一點就會到達不同的星系。請記住這一點。