Intrinsic value of Fortis Inc. - FTS

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$44.18

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$44.18

 
Intrinsic value

$160.46

 
Up/down potential

+263%

 
Rating

str. buy

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of FTS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 18.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  1.20
  20.50
  18.95
  17.56
  16.30
  15.17
  14.15
  13.24
  12.41
  11.67
  11.01
  10.40
  9.86
  9.38
  8.94
  8.55
  8.19
  7.87
  7.58
  7.33
  7.09
  6.88
  6.70
  6.53
  6.37
  6.24
  6.11
  6.00
  5.90
  5.81
  5.73
Revenue, $m
  6,838
  8,240
  9,801
  11,522
  13,400
  15,433
  17,617
  19,949
  22,425
  25,042
  27,798
  30,691
  33,718
  36,880
  40,177
  43,610
  47,183
  50,897
  54,758
  58,769
  62,938
  67,271
  71,776
  76,460
  81,334
  86,406
  91,688
  97,190
  102,926
  108,907
  115,147
Variable operating expenses, $m
 
  4,526
  5,149
  5,836
  6,585
  7,397
  8,269
  9,200
  10,188
  11,233
  12,333
  12,251
  13,460
  14,722
  16,038
  17,409
  18,835
  20,317
  21,859
  23,460
  25,124
  26,854
  28,652
  30,522
  32,467
  34,492
  36,600
  38,797
  41,087
  43,474
  45,965
Fixed operating expenses, $m
 
  1,499
  1,536
  1,574
  1,614
  1,654
  1,695
  1,738
  1,781
  1,826
  1,871
  1,918
  1,966
  2,015
  2,066
  2,117
  2,170
  2,225
  2,280
  2,337
  2,396
  2,456
  2,517
  2,580
  2,644
  2,710
  2,778
  2,848
  2,919
  2,992
  3,067
Total operating expenses, $m
  5,394
  6,025
  6,685
  7,410
  8,199
  9,051
  9,964
  10,938
  11,969
  13,059
  14,204
  14,169
  15,426
  16,737
  18,104
  19,526
  21,005
  22,542
  24,139
  25,797
  27,520
  29,310
  31,169
  33,102
  35,111
  37,202
  39,378
  41,645
  44,006
  46,466
  49,032
Operating income, $m
  1,444
  2,216
  3,116
  4,112
  5,201
  6,382
  7,652
  9,011
  10,455
  11,984
  13,594
  16,521
  18,292
  20,143
  22,073
  24,084
  26,178
  28,355
  30,619
  32,972
  35,419
  37,962
  40,607
  43,358
  46,222
  49,203
  52,309
  55,545
  58,920
  62,441
  66,115
EBITDA, $m
  2,427
  3,553
  4,473
  5,490
  6,602
  7,808
  9,105
  10,493
  11,967
  13,528
  15,172
  16,898
  18,706
  20,596
  22,567
  24,620
  26,757
  28,980
  31,291
  33,694
  36,192
  38,788
  41,489
  44,298
  47,221
  50,265
  53,435
  56,739
  60,184
  63,779
  67,530
Interest expense (income), $m
  644
  832
  1,079
  1,357
  1,664
  1,999
  2,362
  2,751
  3,167
  3,609
  4,075
  4,567
  5,082
  5,622
  6,186
  6,774
  7,386
  8,023
  8,686
  9,374
  10,089
  10,833
  11,606
  12,409
  13,244
  14,113
  15,018
  15,959
  16,941
  17,963
  19,030
Earnings before tax, $m
  858
  1,383
  2,037
  2,754
  3,536
  4,382
  5,291
  6,260
  7,289
  8,375
  9,518
  11,954
  13,210
  14,520
  15,887
  17,310
  18,791
  20,332
  21,933
  23,598
  25,329
  27,129
  29,001
  30,950
  32,978
  35,090
  37,291
  39,586
  41,980
  44,477
  47,085
Tax expense, $m
  145
  374
  550
  744
  955
  1,183
  1,429
  1,690
  1,968
  2,261
  2,570
  3,228
  3,567
  3,920
  4,289
  4,674
  5,074
  5,490
  5,922
  6,371
  6,839
  7,325
  7,830
  8,356
  8,904
  9,474
  10,069
  10,688
  11,334
  12,009
  12,713
Net income, $m
  660
  1,010
  1,487
  2,011
  2,582
  3,199
  3,862
  4,570
  5,321
  6,114
  6,948
  8,727
  9,643
  10,600
  11,597
  12,636
  13,718
  14,842
  16,011
  17,227
  18,490
  19,804
  21,171
  22,593
  24,074
  25,616
  27,223
  28,898
  30,645
  32,469
  34,372

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  269
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  47,904
  57,221
  68,064
  80,013
  93,054
  107,170
  122,338
  138,532
  155,729
  173,906
  193,044
  213,130
  234,153
  256,111
  279,007
  302,851
  327,658
  353,452
  380,261
  408,121
  437,072
  467,162
  498,443
  530,973
  564,816
  600,041
  636,719
  674,932
  714,762
  756,298
  799,634
Adjusted assets (=assets-cash), $m
  47,635
  57,221
  68,064
  80,013
  93,054
  107,170
  122,338
  138,532
  155,729
  173,906
  193,044
  213,130
  234,153
  256,111
  279,007
  302,851
  327,658
  353,452
  380,261
  408,121
  437,072
  467,162
  498,443
  530,973
  564,816
  600,041
  636,719
  674,932
  714,762
  756,298
  799,634
Revenue / Adjusted assets
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
Average production assets, $m
  776
  931
  1,108
  1,302
  1,514
  1,744
  1,991
  2,254
  2,534
  2,830
  3,141
  3,468
  3,810
  4,167
  4,540
  4,928
  5,332
  5,751
  6,188
  6,641
  7,112
  7,602
  8,111
  8,640
  9,191
  9,764
  10,361
  10,982
  11,631
  12,306
  13,012
Working capital, $m
  -1,778
  -684
  -814
  -956
  -1,112
  -1,281
  -1,462
  -1,656
  -1,861
  -2,079
  -2,307
  -2,547
  -2,799
  -3,061
  -3,335
  -3,620
  -3,916
  -4,224
  -4,545
  -4,878
  -5,224
  -5,584
  -5,957
  -6,346
  -6,751
  -7,172
  -7,610
  -8,067
  -8,543
  -9,039
  -9,557
Total debt, $m
  22,759
  29,163
  36,688
  44,981
  54,032
  63,828
  74,354
  85,593
  97,528
  110,143
  123,425
  137,364
  151,954
  167,193
  183,083
  199,630
  216,847
  234,748
  253,353
  272,688
  292,780
  313,662
  335,372
  357,948
  381,435
  405,880
  431,335
  457,855
  485,497
  514,323
  544,398
Total liabilities, $m
  33,307
  39,711
  47,236
  55,529
  64,580
  74,376
  84,902
  96,141
  108,076
  120,691
  133,973
  147,912
  162,502
  177,741
  193,631
  210,178
  227,395
  245,296
  263,901
  283,236
  303,328
  324,210
  345,920
  368,496
  391,983
  416,428
  441,883
  468,403
  496,045
  524,871
  554,946
Total equity, $m
  14,597
  17,510
  20,828
  24,484
  28,475
  32,794
  37,435
  42,391
  47,653
  53,215
  59,072
  65,218
  71,651
  78,370
  85,376
  92,672
  100,263
  108,156
  116,360
  124,885
  133,744
  142,952
  152,524
  162,478
  172,834
  183,612
  194,836
  206,529
  218,717
  231,427
  244,688
Total liabilities and equity, $m
  47,904
  57,221
  68,064
  80,013
  93,055
  107,170
  122,337
  138,532
  155,729
  173,906
  193,045
  213,130
  234,153
  256,111
  279,007
  302,850
  327,658
  353,452
  380,261
  408,121
  437,072
  467,162
  498,444
  530,974
  564,817
  600,040
  636,719
  674,932
  714,762
  756,298
  799,634
Debt-to-equity ratio
  1.559
  1.670
  1.760
  1.840
  1.900
  1.950
  1.990
  2.020
  2.050
  2.070
  2.090
  2.110
  2.120
  2.130
  2.140
  2.150
  2.160
  2.170
  2.180
  2.180
  2.190
  2.190
  2.200
  2.200
  2.210
  2.210
  2.210
  2.220
  2.220
  2.220
  2.220
Adjusted equity ratio
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306
  0.306

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  660
  1,010
  1,487
  2,011
  2,582
  3,199
  3,862
  4,570
  5,321
  6,114
  6,948
  8,727
  9,643
  10,600
  11,597
  12,636
  13,718
  14,842
  16,011
  17,227
  18,490
  19,804
  21,171
  22,593
  24,074
  25,616
  27,223
  28,898
  30,645
  32,469
  34,372
Depreciation, amort., depletion, $m
  983
  1,338
  1,357
  1,378
  1,401
  1,426
  1,453
  1,481
  1,512
  1,544
  1,578
  377
  414
  453
  493
  536
  580
  625
  673
  722
  773
  826
  882
  939
  999
  1,061
  1,126
  1,194
  1,264
  1,338
  1,414
Funds from operations, $m
  1,906
  2,348
  2,844
  3,388
  3,983
  4,625
  5,315
  6,051
  6,832
  7,658
  8,526
  9,104
  10,057
  11,053
  12,091
  13,172
  14,297
  15,467
  16,684
  17,948
  19,263
  20,631
  22,053
  23,532
  25,073
  26,677
  28,349
  30,092
  31,909
  33,806
  35,787
Change in working capital, $m
  22
  -116
  -130
  -143
  -156
  -169
  -181
  -194
  -206
  -217
  -229
  -240
  -251
  -262
  -274
  -285
  -296
  -308
  -320
  -333
  -346
  -360
  -374
  -389
  -404
  -421
  -438
  -457
  -476
  -496
  -518
Cash from operations, $m
  1,884
  2,699
  2,974
  3,531
  4,138
  4,794
  5,496
  6,245
  7,038
  7,875
  8,755
  9,344
  10,308
  11,315
  12,365
  13,457
  14,594
  15,776
  17,004
  18,281
  19,609
  20,990
  22,426
  23,921
  25,477
  27,098
  28,787
  30,548
  32,385
  34,303
  36,305
Maintenance CAPEX, $m
  0
  -84
  -101
  -120
  -142
  -165
  -190
  -216
  -245
  -275
  -308
  -341
  -377
  -414
  -453
  -493
  -536
  -580
  -625
  -673
  -722
  -773
  -826
  -882
  -939
  -999
  -1,061
  -1,126
  -1,194
  -1,264
  -1,338
New CAPEX, $m
  -2,061
  -155
  -176
  -194
  -212
  -230
  -247
  -264
  -280
  -296
  -311
  -327
  -342
  -357
  -373
  -388
  -404
  -420
  -436
  -453
  -471
  -490
  -509
  -529
  -551
  -573
  -597
  -622
  -648
  -676
  -705
Cash from investing activities, $m
  -6,891
  -239
  -277
  -314
  -354
  -395
  -437
  -480
  -525
  -571
  -619
  -668
  -719
  -771
  -826
  -881
  -940
  -1,000
  -1,061
  -1,126
  -1,193
  -1,263
  -1,335
  -1,411
  -1,490
  -1,572
  -1,658
  -1,748
  -1,842
  -1,940
  -2,043
Free cash flow, $m
  -5,007
  2,459
  2,696
  3,216
  3,785
  4,400
  5,060
  5,765
  6,513
  7,304
  8,136
  8,675
  9,589
  10,544
  11,539
  12,576
  13,654
  14,776
  15,943
  17,156
  18,416
  19,727
  21,091
  22,510
  23,987
  25,526
  27,129
  28,800
  30,543
  32,363
  34,262
Issuance/(repayment) of debt, $m
  4,285
  6,673
  7,525
  8,292
  9,051
  9,796
  10,526
  11,239
  11,935
  12,615
  13,282
  13,939
  14,590
  15,239
  15,890
  16,547
  17,216
  17,901
  18,606
  19,335
  20,092
  20,882
  21,709
  22,576
  23,487
  24,446
  25,455
  26,519
  27,642
  28,826
  30,075
Issuance/(repurchase) of shares, $m
  -155
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  5,438
  6,673
  7,525
  8,292
  9,051
  9,796
  10,526
  11,239
  11,935
  12,615
  13,282
  13,939
  14,590
  15,239
  15,890
  16,547
  17,216
  17,901
  18,606
  19,335
  20,092
  20,882
  21,709
  22,576
  23,487
  24,446
  25,455
  26,519
  27,642
  28,826
  30,075
Total cash flow (excl. dividends), $m
  415
  9,133
  10,221
  11,509
  12,836
  14,196
  15,586
  17,004
  18,448
  19,919
  21,418
  22,615
  24,179
  25,783
  27,429
  29,123
  30,871
  32,677
  34,548
  36,490
  38,509
  40,610
  42,800
  45,086
  47,474
  49,972
  52,584
  55,320
  58,185
  61,189
  64,337
Retained Cash Flow (-), $m
  -4,717
  -2,913
  -3,318
  -3,656
  -3,991
  -4,319
  -4,641
  -4,955
  -5,262
  -5,562
  -5,856
  -6,146
  -6,433
  -6,719
  -7,006
  -7,296
  -7,591
  -7,893
  -8,204
  -8,525
  -8,859
  -9,208
  -9,572
  -9,954
  -10,356
  -10,779
  -11,224
  -11,693
  -12,188
  -12,710
  -13,261
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  6,220
  6,903
  7,853
  8,845
  9,877
  10,945
  12,048
  13,186
  14,357
  15,562
  16,469
  17,746
  19,064
  20,423
  21,827
  23,280
  24,784
  26,345
  27,965
  29,649
  31,402
  33,228
  35,132
  37,119
  39,193
  41,361
  43,627
  45,998
  48,479
  51,076
Discount rate, %
 
  10.00
  10.50
  11.03
  11.58
  12.16
  12.76
  13.40
  14.07
  14.77
  15.51
  16.29
  17.10
  17.96
  18.86
  19.80
  20.79
  21.83
  22.92
  24.07
  25.27
  26.53
  27.86
  29.25
  30.72
  32.25
  33.86
  35.56
  37.33
  39.20
  41.16
PV of cash for distribution, $m
 
  5,655
  5,654
  5,738
  5,707
  5,566
  5,324
  4,996
  4,599
  4,154
  3,679
  3,131
  2,669
  2,227
  1,819
  1,453
  1,134
  864
  642
  465
  327
  224
  149
  96
  60
  36
  21
  12
  6
  3
  2
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Fortis Inc. operates as an electric and gas utility company in Canada, the United States, and the Caribbean. It generates, transmits, and distributes electricity to approximately 417,000 retail customers in southeastern Arizona, including the greater Tucson metropolitan area in Pima county, as well as parts of Cochise county approximately 94,000 retail customers in Arizona’s Mohave and Santa Cruz counties with an aggregate capacity of 2,799 megawatts (MW) comprising 54 MW of solar capacity. The company also sells wholesale electricity to other entities in the western United States; owns gas-fired and hydroelectric generating capacity totaling 64 MW; and distributes natural gas to approximately 982,000 customers in approximately 135 communities in British Columbia, Canada. In addition, it owns and operates the electricity distribution system that serves approximately 539,000 customers in southern and central Alberta; owns 4 hydroelectric generating facilities with a combined capacity of 225 MW; and provides operation, maintenance, and management services to hydroelectric generating facilities. Further, the company distributes electricity in the island portion of Newfoundland and Labrador serving approximately 262,000 customers with an installed generating capacity of 139 MW, including 97 MW is hydroelectric generation; and on Prince Edward Island serving approximately 78,000 customers through generating facilities with a combined capacity of 150 MW. Additionally, it provides integrated electric utility service to approximately 65,000 customers in Fort Erie, Cornwall, Gananoque, Port Colborne and the District of Algoma in Ontario; approximately 28,000 customers on Grand Cayman, Cayman Islands; and approximately 14,000 customers on certain islands in Turks and Caicos, as well as holds long-term contracted generation assets in British Columbia and Belize. Fortis Inc. was founded in 1977 and is based in St. John's, Canada.

FINANCIAL RATIOS  of  Fortis Inc. (FTS)

Valuation Ratios
P/E Ratio 26.9
Price to Sales 2.6
Price to Book 1.2
Price to Tangible Book
Price to Cash Flow 9.4
Price to Free Cash Flow -100.2
Growth Rates
Sales Growth Rate 1.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -9.4%
Cap. Spend. - 3 Yr. Gr. Rate 11.9%
Financial Strength
Quick Ratio 0
Current Ratio 0.1
LT Debt to Equity 145.8%
Total Debt to Equity 155.9%
Interest Coverage 2
Management Effectiveness
Return On Assets 3.1%
Ret/ On Assets - 3 Yr. Avg. 3.8%
Return On Total Capital 2.2%
Ret/ On T. Cap. - 3 Yr. Avg. 2.8%
Return On Equity 5.4%
Return On Equity - 3 Yr. Avg. 6.4%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 36.3%
EBITDA Margin - 3 Yr. Avg. 34.8%
Operating Margin 21.1%
Oper. Margin - 3 Yr. Avg. 20%
Pre-Tax Margin 12.5%
Pre-Tax Margin - 3 Yr. Avg. 12.2%
Net Profit Margin 9.7%
Net Profit Margin - 3 Yr. Avg. 9.5%
Effective Tax Rate 16.9%
Eff/ Tax Rate - 3 Yr. Avg. 17.5%
Payout Ratio 58.8%

FTS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FTS stock intrinsic value calculation we used $6838 million for the last fiscal year's total revenue generated by Fortis Inc.. The default revenue input number comes from 2016 income statement of Fortis Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our FTS stock valuation model: a) initial revenue growth rate of 20.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 10%, whose default value for FTS is calculated based on our internal credit rating of Fortis Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Fortis Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of FTS stock the variable cost ratio is equal to 58%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1462 million in the base year in the intrinsic value calculation for FTS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.7% for Fortis Inc..

Corporate tax rate of 27% is the nominal tax rate for Fortis Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the FTS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for FTS are equal to 11.3%.

Life of production assets of 9.2 years is the average useful life of capital assets used in Fortis Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for FTS is equal to -8.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $14597 million for Fortis Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 413.887 million for Fortis Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Fortis Inc. at the current share price and the inputted number of shares is $18.3 billion.


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Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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