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Capital Power Corp Valuation – Initial Coverage $TSE:CPX

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Capital Power Corp (TSE:CPX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Capital Power Corp (Capital Power) is a power producing company. The Company develops, acquires, operates and optimizes power generation from a range of energy sources. It operates through the operation of electrical generation facilities within Canada (Alberta, British Columbia and Ontario) and in the United States (North Carolina and New Mexico) segment. It also holds a portfolio of wind and solar development sites in the United States. Capital Power owns over 3,200 megawatts (MW) of power generation capacity across North America and owns approximately 370 MW of capacity through its interest in Sundance power purchase agreement (PPA). It has over 530 MW of owned capacity under construction or in advanced stages of development in Alberta. It owns approximately 2,370 MW of power generation capacity in Alberta, with ownership interests in over nine facilities. Its power generation operations and assets are owned by Capital Power L.P. (CPLP), a subsidiary of the Company.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-CPX – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $2,444,199,952 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.91 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 146.07% Pass
6. Moderate PEmg Ratio PEmg < 20 25.94 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.92 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.91 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -35.57 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $0.98
MG Growth Estimate 0.29%
MG Value $8.90
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $14.20
MG Value based on 0% Growth $8.32
Market Implied Growth Rate 8.72%
Current Price $25.40
% of Intrinsic Value 285.55%

Capital Power Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.96 in 2012 to an estimated $0.98 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.72% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Capital Power Corp revealed the company was trading below its Graham Number of $27.42. The company pays a dividend of $1.49 per share, for a yield of 5.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 25.94, which was above the industry average of 23.36. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-22.7.

Capital Power Corp receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$22.70
Graham Number $27.42
PEmg 25.94
Current Ratio 0.91
PB Ratio 0.92
Current Dividend $1.49
Dividend Yield 5.85%
Number of Consecutive Years of Dividend Growth 3

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $376,000,000
Total Current Liabilities $413,000,000
Long-Term Debt $1,316,000,000
Total Assets $5,219,000,000
Intangible Assets $320,000,000
Total Liabilities $2,561,000,000
Shares Outstanding (Diluted Average) 96,262,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.21
Dec2015 $0.70
Dec2014 $0.28
Dec2013 $2.08
Dec2012 $0.84
Dec2011 $1.59
Dec2010 $0.69
Dec2009 $0.89

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.98
Dec2015 $0.94
Dec2014 $1.07
Dec2013 $1.39
Dec2012 $0.96
Dec2011 $0.89
Dec2010 $0.47
Dec2009 $0.30

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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