Investors constantly seek opportunities where the market may not have fully recognized a stock's potential. In the case of Pinnacle West Capital Corp (PNW, Financial), a recent daily gain of 1.47% and a modest 3-month loss of -1.05% prompt the question of valuation accuracy. With an Earnings Per Share (EPS) of 4.2, we delve into whether Pinnacle West Capital's current market price reflects its true worth, or if it stands as a modestly undervalued investment opportunity. Read on for a detailed valuation analysis of this intriguing utility company.
Company Introduction
Pinnacle West Capital Corp, with its principal subsidiary Arizona Public Service, is an integral electricity provider in central Arizona, including Phoenix. The company's extensive portfolio, including a significant stake in the U.S.'s largest nuclear plant, Palo Verde, and a commitment to clean energy, positions it as a formidable player in the utilities sector. At a current price of $71.84 per share and a market cap of $8.10 billion, Pinnacle West Capital's valuation against the GF Value of $88.56 suggests a potential undervaluation. This discrepancy sets the stage for an in-depth analysis of the company's intrinsic value.
Summarize GF Value
The GF Value is a unique measure that estimates the intrinsic value of a stock based on historical trading multiples, a GuruFocus adjustment factor, and future business performance projections. The GF Value Line suggests the fair trading value for a stock, and Pinnacle West Capital (PNW, Financial) appears modestly undervalued by this metric. The implication is that the stock may offer a higher long-term return than its business growth alone would suggest, making it a potentially attractive investment for value seekers.
Financial Strength
Assessing the financial strength of a company is crucial to avoid permanent capital loss. Pinnacle West Capital's cash-to-debt ratio stands at 0, a concerning signal when compared to its industry peers. With a financial strength rating of 3 out of 10, the company's ability to manage debt is questionable, underscoring the importance of a thorough financial review before investment.
Profitability and Growth
Profitability is a key indicator of a company's investment safety, and Pinnacle West Capital has maintained profitability over the past decade. With an operating margin of 16.7%, the company's profitability is commendable within its industry. However, growth analysis reveals mixed results; while Pinnacle West Capital's revenue growth is below industry median, its EBITDA growth is competitive, suggesting a nuanced growth trajectory.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC) provides insight into value creation. Pinnacle West Capital's ROIC of 3.05 falls short of its WACC of 5.14, indicating that it is not generating sufficient returns on investments to cover its capital costs, a potential red flag for value-driven investors.
Conclusion
While Pinnacle West Capital (PNW, Financial) is considered modestly undervalued according to the GF Value, it's essential to weigh this against the backdrop of its financial strength, profitability, and growth prospects. With a financial condition rated as poor and mixed growth indicators, investors should proceed with caution. To gain a more comprehensive understanding of Pinnacle West Capital's financial health, interested parties are encouraged to review its 30-Year Financials here.
To discover high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
