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A Look At The Fair Value Of Portland General Electric Company (NYSE:POR)

In this article I am going to calculate the intrinsic value of Portland General Electric Company (NYSE:POR) by taking the foreast future cash flows of the company and discounting them back to todayâ€™s value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not August 2018 then I highly recommend you check out the latest calculation for Portland General Electric by following the link below.

The method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second â€˜steady growthâ€™ period. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to todayâ€™s value.

5-year cash flow estimate

 2018 2019 2020 2021 2022 Levered FCF (\$, Millions) \$98.00 \$239.50 \$270.00 \$275.61 \$281.33 Source Analyst x1 Analyst x2 Analyst x1 Est @ 2.08% Est @ 2.08% Present Value Discounted @ 8.59% \$90.25 \$203.11 \$210.86 \$198.21 \$186.33

Present Value of 5-year Cash Flow (PVCF)= US\$888.8m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to todayâ€™s value at a cost of equity of 8.6%.

Terminal Value (TV) = FCF2022 Ã— (1 + g) Ã· (r â€“ g) = US\$281.3m Ã— (1 + 2.9%) Ã· (8.6% â€“ 2.9%) = US\$5.14b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US\$5.14b Ã· ( 1 + 8.6%)5 = US\$3.40b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US\$4.29b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of \$48.07. Relative to the current share price of \$46.32, the stock is about right, perhaps slightly undervalued at a 3.6% discount to what it is available for right now.

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you donâ€™t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Portland General Electric as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation Iâ€™ve used 8.6%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldnâ€™t be the only metric you look at when researching a company. For POR, Iâ€™ve put together three key factors you should further research:

1. Financial Health: Does POR have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does PORâ€™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.
3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of POR? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.