Is Pinnacle West Capital Corp (PNW) Modestly Undervalued?
The stock of Pinnacle West Capital Corp (NYSE:PNW) experienced a daily loss of -2.49 %, and a 3-month loss of -3.24%. With an Earnings Per Share (EPS) of 3.58, is the stock modestly undervalued? This article aims to answer this question by providing a thorough valuation analysis. Read on to gain insights into the intrinsic value of Pinnacle West Capital (NYSE:PNW).
Company Introduction
Pinnacle West Capital Corp is a holding company, and its primary subsidiary is Arizona Public Service, a vertically integrated electric utility. The company serves 1.3 million customers across a 35,000-square-mile territory in central Arizona, including Phoenix. With power generation capacity exceeding 6 gigawatts, Pinnacle West Capital Corp owns or leases a significant portion of its power resources. The company's stock price currently stands at $76.62, whereas its GF Value, an estimate of fair value, is $90.01. This article aims to delve deeper into the company's value by combining financial assessment with essential company details.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, derived from a proprietary method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. This value is calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance. According to our method, Pinnacle West Capital (NYSE:PNW) appears to be modestly undervalued.
As Pinnacle West Capital is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth. Link: These companies may deliver higher future returns at reduced risk.
Examining Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is critical to review a company's financial strength before deciding to buy its stock. Pinnacle West Capital's cash-to-debt ratio of 0 is worse than 0% of companies in the Utilities - Regulated industry. GuruFocus ranks Pinnacle West Capital's overall financial strength at 3 out of 10, indicating that its financial strength is poor.
Profitability and Growth
Investing in profitable companies carries less risk, especially those that have demonstrated consistent profitability over the long term. Pinnacle West Capital has been profitable for 10 years over the past decade. The company had revenues of $4.50 billion and Earnings Per Share (EPS) of $3.58 in the past 12 months. Its operating margin of 15.14% is better than 60.08% of companies in the Utilities - Regulated industry. GuruFocus ranks Pinnacle West Capital's profitability as fair.
Growth is a critical factor in a company's valuation. GuruFocus research indicates that growth is closely correlated with the long-term stock performance of a company. A faster-growing company creates more value for shareholders, particularly if the growth is profitable. The 3-year average annual revenue growth of Pinnacle West Capital is 7.4%, which ranks worse than 52.07% of companies in the Utilities - Regulated industry. However, its 3-year average EBITDA growth rate is 4.8%, ranking better than 52.61% of companies in the industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Pinnacle West Capital's ROIC was 2.68, while its WACC came in at 4.65.
Conclusion
In conclusion, the stock of Pinnacle West Capital Corp (NYSE:PNW) shows every sign of being modestly undervalued. The company's financial condition is poor, and its profitability is fair. Its growth ranks better than 52.61% of companies in the Utilities - Regulated industry. To learn more about Pinnacle West Capital stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
