Is Pinnacle West Capital (PNW) Modestly Undervalued?
Recent market activity shows Pinnacle West Capital Corp (NYSE:PNW) experiencing a daily loss of 1.62% and a marginal 3-month gain of 0.61%. With an Earnings Per Share (EPS) (EPS) of 3.58, the question arises: is the stock modestly undervalued? This article aims to answer this question through an in-depth valuation analysis of Pinnacle West Capital. Read on to discover more about the company's financial health and future prospects.
Introduction to Pinnacle West Capital Corp
Pinnacle West Capital Corp is a holding company whose principal subsidiary, Arizona Public Service, serves 1.3 million customers across a 35,000-square-mile territory in central Arizona, including Phoenix. With a power generation capacity of over 6 gigawatts, Pinnacle West Capital Corp has a diverse energy portfolio, including a 29% stake in the largest nuclear plant in the US, Palo Verde. The company's stock price currently stands at $76.98, while its GF Value, an estimation of fair value, is $87.74. This article will explore whether the stock is indeed modestly undervalued.
Understanding the GF Value
The GF Value is an exclusive GuruFocus valuation method that represents the current intrinsic value of a stock. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. This value is computed based on historical multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates. If the stock price is significantly above the GF Value Line, it is considered overvalued, and if it's significantly below, it is considered undervalued.
At its current price of $76.98 per share, Pinnacle West Capital Corp (NYSE:PNW) appears to be modestly undervalued according to the GF Value. The company has a market cap of $8.70 billion. As the stock 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.
Pinnacle West Capital's Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Pinnacle West Capital has a cash-to-debt ratio of 0, ranking worse than 0% of 478 companies in the Utilities - Regulated industry. The overall financial strength of Pinnacle West Capital is 3 out of 10, indicating that its financial strength is poor.
Profitability and Growth of Pinnacle West Capital
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. A company with high profit margins is typically a safer investment than one with low profit margins. Pinnacle West Capital has been profitable 10 times over the past 10 years. Over the past twelve months, the company had a revenue of $4.50 billion and an EPS of $3.58. Its operating margin is 15.14%, which ranks better than 58.37% of 502 companies in the Utilities - Regulated industry. Overall, GuruFocus ranks the profitability of Pinnacle West Capital at 7 out of 10, indicating fair profitability.
Growth is a crucial factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Pinnacle West Capital is 7.4%, ranking worse than 52.16% of 485 companies in the Utilities - Regulated industry. However, its 3-year average EBITDA growth rate is 4.8%, ranking better than 52.83% of 460 companies in the same industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Pinnacle West Capital's ROIC is 2.68, and its WACC is 4.75.
Conclusion
In summary, the stock of Pinnacle West Capital Corp (NYSE:PNW) gives every indication of being modestly undervalued. The company's financial condition is poor, its profitability is fair, and its growth ranks better than 52.83% of 460 companies in the Utilities - Regulated industry. To learn more about Pinnacle West Capital stock, you can check out its 30-Year Financials here.
To find out the high quality companies that may deliver above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.
