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- Gas Utilities
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- NYSE:NWN
Is Northwest Natural Holding Company (NYSE:NWN) Worth US$51.1 Based On Its Intrinsic Value?
Key Insights
- Northwest Natural Holding's estimated fair value is US$41.5 based on Dividend Discount Model
- Current share price of US$51.1 suggests Northwest Natural Holding is 23% overvalued
- Analyst price target for NWN is US$55.14 which is 33% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Northwest Natural Holding Company (NYSE:NWN) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Northwest Natural Holding
Step By Step Through The Calculation
As Northwest Natural Holding operates in the gas utilities sector, we need to calculate the intrinsic value slightly differently. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (2.0%). The expected dividend per share is then discounted to today's value at a cost of equity of 6.8%. Relative to the current share price of US$51.1, the company appears slightly overvalued at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= US$2.0 / (6.8% – 2.0%)
= US$41.5
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Northwest Natural Holding as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.8%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Northwest Natural Holding
- Debt is well covered by earnings.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Gas Utilities market.
- Expensive based on P/E ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow for the next 4 years.
- Debt is not well covered by operating cash flow.
- Paying a dividend but company has no free cash flows.
- Annual earnings are forecast to grow slower than the American market.
Looking Ahead:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For Northwest Natural Holding, we've compiled three relevant aspects you should assess:
- Risks: You should be aware of the 3 warning signs for Northwest Natural Holding (1 is significant!) we've uncovered before considering an investment in the company.
- Future Earnings: How does NWN's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if Northwest Natural Holding might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NYSE:NWN
Northwest Natural Holding
Through its subsidiary, Northwest Natural Gas Company, provides regulated natural gas distribution services to residential, commercial, and industrial customers in the United States.
Average dividend payer low.