Pinnacle West Capital Corp Valuation – December 2015 Update $PNW

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 Most Undervalued Companies for the Defensive Investor – November 2015.  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 Pinnacle West Capital Corp (PNW) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Pinnacle West Capital Corporation is a holding company that operates primarily through its wholly owned subsidiaries is engaged in regulated retail and wholesale electricity businesses. The Company’s operations primarily include electricity generation, transmission and distribution. The Company’s subsidiaries include Arizona Public Service Company (APS), a vertically integrated electric utility that provides either retail or wholesale electric service to the State of Arizona, with the exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona; El Dorado Investment Company (El Dorado) and Bright Canyon Energy Corporation (BCE). APS provides electric service to approximately 1.2 million customers. APS has ownership interests in or leases the coal, nuclear, gas, oil and solar generating facilities.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of PNW – December 2015

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 $7,009,428,556 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.70 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 25.34% Fail
6. Moderate PEmg Ratio PEmg < 20 17.09 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.47 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 0.70 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -7.06 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

PNW value Chart December 2015

EPSmg $3.58
MG Growth Estimate 6.00%
MG Value $73.43
Opinion Fairly Valued
MG Value based on 3% Growth $51.95
MG Value based on 0% Growth $30.45
Market Implied Growth Rate 4.30%
Current Price $61.23
% of Intrinsic Value 83.39%

Pinnacle West Capital Corp does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio and the insufficient earnings growth over the last ten years.  The Enterprising Investor is concerned by the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.56 in 2011 to an estimated $3.58 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 4.3% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Pinnacle West Capital Corp (PNW)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

PNW Charts December 2015

Net Current Asset Value (NCAV) -$82.06
Graham Number $59.04
PEmg 17.09
Current Ratio 0.70
PB Ratio 1.47
Dividend Yield 3.89%
Number of Consecutive Years of Dividend Growth 4



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Most Recent Balance Sheet Figures

Balance Sheet Information Sep15
Total Current Assets $1,061,979,000
Total Current Liabilities $1,523,362,000
Long-Term Debt $3,257,347,000
Total Assets $14,875,020,000
Intangible Assets $134,937,000
Total Liabilities $10,221,370,000
Shares Outstanding (Diluted Average) 111,616,000

Earnings Per Share History

Next Fiscal Year Estimate $3.69
Dec14 $3.58
Dec13 $3.66
Dec12 $3.45
Dec11 $3.09
Dec10 $3.27
Dec09 $0.67
Dec08 $2.40
Dec07 $3.05
Dec06 $3.27
Dec05 $1.82
Dec04 $2.66
Dec03 $2.63
Dec02 $1.76
Dec01 $3.68
Dec00 $3.56
Dec99 $1.97
Dec98 $2.85
Dec97 $2.74
Dec96 $2.06
Dec95 $2.15

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.58
Dec14 $3.49
Dec13 $3.24
Dec12 $2.88
Dec11 $2.56
Dec10 $2.37
Dec09 $2.03
Dec08 $2.69
Dec07 $2.78
Dec06 $2.58
Dec05 $2.32
Dec04 $2.67
Dec03 $2.69
Dec02 $2.73
Dec01 $3.13
Dec00 $2.78
Dec99 $2.38

Recommended Reading:

Other ModernGraham posts about the company

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Pinnacle West Capital Corporation Annual Valuation – 2014 $PNW

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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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