Intrinsic value of CenterPoint Energy - CNP

Previous Close

$29.01

  Intrinsic Value

$160.14

stock screener

  Rating & Target

str. buy

+452%

  Value-price divergence*

+45%

Previous close

$29.01

 
Intrinsic value

$160.14

 
Up/down potential

+452%

 
Rating

str. buy

 
Value-price divergence*

+45%

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

We calculate the intrinsic value of CNP 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 12.7

 

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, %
  1.92
  37.90
  34.61
  31.65
  28.98
  26.59
  24.43
  22.48
  20.74
  19.16
  17.75
  16.47
  15.32
  14.29
  13.36
  12.53
  11.77
  11.10
  10.49
  9.94
  9.44
  9.00
  8.60
  8.24
  7.92
  7.62
  7.36
  7.13
  6.91
  6.72
  6.55
Revenue, $m
  0
  10,381
  13,974
  18,397
  23,729
  30,037
  37,374
  45,778
  55,270
  65,861
  77,549
  90,323
  104,164
  119,051
  134,960
  151,866
  169,746
  188,582
  208,358
  229,065
  250,698
  273,261
  296,761
  321,214
  346,641
  373,070
  400,535
  429,075
  458,738
  489,574
  521,639
Variable operating expenses, $m
 
  8,449
  11,343
  14,906
  19,201
  24,283
  30,193
  36,963
  44,609
  53,141
  62,556
  72,760
  83,909
  95,902
  108,717
  122,335
  136,739
  151,912
  167,843
  184,523
  201,950
  220,125
  239,056
  258,753
  279,236
  300,526
  322,650
  345,641
  369,536
  394,376
  420,206
Fixed operating expenses, $m
 
  440
  451
  462
  474
  485
  498
  510
  523
  536
  549
  563
  577
  591
  606
  621
  637
  653
  669
  686
  703
  721
  739
  757
  776
  795
  815
  836
  856
  878
  900
Total operating expenses, $m
  6,569
  8,889
  11,794
  15,368
  19,675
  24,768
  30,691
  37,473
  45,132
  53,677
  63,105
  73,323
  84,486
  96,493
  109,323
  122,956
  137,376
  152,565
  168,512
  185,209
  202,653
  220,846
  239,795
  259,510
  280,012
  301,321
  323,465
  346,477
  370,392
  395,254
  421,106
Operating income, $m
  959
  1,493
  2,180
  3,029
  4,054
  5,269
  6,684
  8,305
  10,138
  12,185
  14,444
  17,000
  19,678
  22,558
  25,637
  28,909
  32,370
  36,017
  39,846
  43,856
  48,045
  52,415
  56,967
  61,703
  66,629
  71,748
  77,069
  82,598
  88,345
  94,320
  100,533
EBITDA, $m
  2,085
  2,399
  3,370
  4,569
  6,015
  7,728
  9,723
  12,008
  14,591
  17,474
  20,657
  24,136
  27,907
  31,963
  36,299
  40,906
  45,780
  50,915
  56,306
  61,952
  67,851
  74,003
  80,411
  87,079
  94,013
  101,221
  108,711
  116,495
  124,586
  132,996
  141,743
Interest expense (income), $m
  406
  360
  647
  1,008
  1,454
  1,991
  2,626
  3,365
  4,211
  5,167
  6,233
  7,410
  8,696
  10,090
  11,589
  13,191
  14,893
  16,693
  18,590
  20,581
  22,666
  24,845
  27,117
  29,483
  31,945
  34,505
  37,167
  39,932
  42,806
  45,793
  48,898
Earnings before tax, $m
  686
  1,133
  1,534
  2,021
  2,601
  3,279
  4,058
  4,941
  5,928
  7,018
  8,211
  9,590
  10,982
  12,468
  14,048
  15,718
  17,477
  19,324
  21,256
  23,275
  25,379
  27,570
  29,850
  32,220
  34,683
  37,243
  39,902
  42,666
  45,539
  48,527
  51,635
Tax expense, $m
  254
  306
  414
  546
  702
  885
  1,096
  1,334
  1,600
  1,895
  2,217
  2,589
  2,965
  3,366
  3,793
  4,244
  4,719
  5,217
  5,739
  6,284
  6,852
  7,444
  8,060
  8,699
  9,365
  10,056
  10,774
  11,520
  12,296
  13,102
  13,942
Net income, $m
  432
  827
  1,120
  1,475
  1,898
  2,393
  2,962
  3,607
  4,327
  5,123
  5,994
  7,001
  8,017
  9,102
  10,255
  11,474
  12,758
  14,106
  15,517
  16,990
  18,527
  20,126
  21,791
  23,521
  25,319
  27,187
  29,129
  31,146
  33,244
  35,425
  37,694

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,294
  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
  21,829
  28,520
  38,390
  50,540
  65,189
  82,520
  102,677
  125,763
  151,842
  180,938
  213,048
  248,140
  286,166
  327,064
  370,769
  417,213
  466,335
  518,082
  572,412
  629,299
  688,731
  750,716
  815,277
  882,455
  952,309
  1,024,917
  1,100,370
  1,178,779
  1,260,269
  1,344,982
  1,433,074
Adjusted assets (=assets-cash), $m
  20,535
  28,520
  38,390
  50,540
  65,189
  82,520
  102,677
  125,763
  151,842
  180,938
  213,048
  248,140
  286,166
  327,064
  370,769
  417,213
  466,335
  518,082
  572,412
  629,299
  688,731
  750,716
  815,277
  882,455
  952,309
  1,024,917
  1,100,370
  1,178,779
  1,260,269
  1,344,982
  1,433,074
Revenue / Adjusted assets
  0.000
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
  0.364
Average production assets, $m
  5,948
  8,201
  11,039
  14,533
  18,746
  23,729
  29,526
  36,165
  43,664
  52,031
  61,264
  71,355
  82,290
  94,051
  106,618
  119,974
  134,099
  148,980
  164,603
  180,961
  198,052
  215,876
  234,441
  253,759
  273,846
  294,725
  316,422
  338,970
  362,403
  386,763
  412,095
Working capital, $m
  -157
  446
  601
  791
  1,020
  1,292
  1,607
  1,968
  2,377
  2,832
  3,335
  3,884
  4,479
  5,119
  5,803
  6,530
  7,299
  8,109
  8,959
  9,850
  10,780
  11,750
  12,761
  13,812
  14,906
  16,042
  17,223
  18,450
  19,726
  21,052
  22,430
Total debt, $m
  9,309
  14,697
  22,919
  33,040
  45,242
  59,679
  76,470
  95,701
  117,424
  141,661
  168,409
  197,640
  229,316
  263,384
  299,790
  338,478
  379,397
  422,502
  467,759
  515,146
  564,653
  616,287
  670,066
  726,025
  784,214
  844,695
  907,548
  972,863
  1,040,744
  1,111,310
  1,184,690
Total liabilities, $m
  18,369
  23,757
  31,979
  42,100
  54,302
  68,739
  85,530
  104,761
  126,484
  150,721
  177,469
  206,700
  238,376
  272,444
  308,850
  347,538
  388,457
  431,562
  476,819
  524,206
  573,713
  625,347
  679,126
  735,085
  793,274
  853,755
  916,608
  981,923
  1,049,804
  1,120,370
  1,193,750
Total equity, $m
  3,460
  4,763
  6,411
  8,440
  10,887
  13,781
  17,147
  21,002
  25,358
  30,217
  35,579
  41,439
  47,790
  54,620
  61,918
  69,675
  77,878
  86,520
  95,593
  105,093
  115,018
  125,370
  136,151
  147,370
  159,036
  171,161
  183,762
  196,856
  210,465
  224,612
  239,323
Total liabilities and equity, $m
  21,829
  28,520
  38,390
  50,540
  65,189
  82,520
  102,677
  125,763
  151,842
  180,938
  213,048
  248,139
  286,166
  327,064
  370,768
  417,213
  466,335
  518,082
  572,412
  629,299
  688,731
  750,717
  815,277
  882,455
  952,310
  1,024,916
  1,100,370
  1,178,779
  1,260,269
  1,344,982
  1,433,073
Debt-to-equity ratio
  2.690
  3.090
  3.570
  3.910
  4.160
  4.330
  4.460
  4.560
  4.630
  4.690
  4.730
  4.770
  4.800
  4.820
  4.840
  4.860
  4.870
  4.880
  4.890
  4.900
  4.910
  4.920
  4.920
  4.930
  4.930
  4.940
  4.940
  4.940
  4.940
  4.950
  4.950
Adjusted equity ratio
  0.142
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  432
  827
  1,120
  1,475
  1,898
  2,393
  2,962
  3,607
  4,327
  5,123
  5,994
  7,001
  8,017
  9,102
  10,255
  11,474
  12,758
  14,106
  15,517
  16,990
  18,527
  20,126
  21,791
  23,521
  25,319
  27,187
  29,129
  31,146
  33,244
  35,425
  37,694
Depreciation, amort., depletion, $m
  1,126
  906
  1,190
  1,540
  1,961
  2,459
  3,039
  3,703
  4,453
  5,289
  6,213
  7,136
  8,229
  9,405
  10,662
  11,997
  13,410
  14,898
  16,460
  18,096
  19,805
  21,588
  23,444
  25,376
  27,385
  29,473
  31,642
  33,897
  36,240
  38,676
  41,209
Funds from operations, $m
  2,188
  1,733
  2,310
  3,015
  3,859
  4,852
  6,001
  7,309
  8,780
  10,413
  12,207
  14,137
  16,246
  18,507
  20,917
  23,472
  26,168
  29,004
  31,977
  35,087
  38,332
  41,714
  45,235
  48,897
  52,704
  56,660
  60,771
  65,043
  69,484
  74,101
  78,903
Change in working capital, $m
  260
  123
  154
  190
  229
  271
  316
  361
  408
  455
  503
  549
  595
  640
  684
  727
  769
  810
  850
  890
  930
  970
  1,011
  1,051
  1,093
  1,136
  1,181
  1,227
  1,275
  1,326
  1,379
Cash from operations, $m
  1,928
  1,611
  2,155
  2,824
  3,630
  4,581
  5,686
  6,948
  8,372
  9,957
  11,704
  13,587
  15,650
  17,867
  20,233
  22,745
  25,399
  28,194
  31,127
  34,196
  37,402
  40,744
  44,224
  47,845
  51,610
  55,523
  59,590
  63,816
  68,209
  72,775
  77,525
Maintenance CAPEX, $m
  0
  -595
  -820
  -1,104
  -1,453
  -1,875
  -2,373
  -2,953
  -3,616
  -4,366
  -5,203
  -6,126
  -7,136
  -8,229
  -9,405
  -10,662
  -11,997
  -13,410
  -14,898
  -16,460
  -18,096
  -19,805
  -21,588
  -23,444
  -25,376
  -27,385
  -29,473
  -31,642
  -33,897
  -36,240
  -38,676
New CAPEX, $m
  -1,414
  -2,253
  -2,838
  -3,494
  -4,212
  -4,984
  -5,796
  -6,639
  -7,499
  -8,367
  -9,233
  -10,091
  -10,935
  -11,761
  -12,568
  -13,356
  -14,125
  -14,880
  -15,623
  -16,358
  -17,091
  -17,824
  -18,565
  -19,318
  -20,087
  -20,879
  -21,697
  -22,547
  -23,433
  -24,360
  -25,332
Cash from investing activities, $m
  -1,046
  -2,848
  -3,658
  -4,598
  -5,665
  -6,859
  -8,169
  -9,592
  -11,115
  -12,733
  -14,436
  -16,217
  -18,071
  -19,990
  -21,973
  -24,018
  -26,122
  -28,290
  -30,521
  -32,818
  -35,187
  -37,629
  -40,153
  -42,762
  -45,463
  -48,264
  -51,170
  -54,189
  -57,330
  -60,600
  -64,008
Free cash flow, $m
  882
  -1,237
  -1,503
  -1,773
  -2,036
  -2,277
  -2,484
  -2,643
  -2,744
  -2,776
  -2,732
  -2,630
  -2,420
  -2,123
  -1,740
  -1,273
  -723
  -96
  606
  1,377
  2,215
  3,114
  4,072
  5,083
  6,147
  7,260
  8,420
  9,627
  10,878
  12,175
  13,517
Issuance/(repayment) of debt, $m
  -154
  6,521
  8,222
  10,121
  12,202
  14,437
  16,791
  19,231
  21,723
  24,237
  26,747
  29,232
  31,676
  34,069
  36,406
  38,688
  40,919
  43,105
  45,257
  47,387
  49,508
  51,633
  53,779
  55,959
  58,189
  60,482
  62,852
  65,315
  67,882
  70,566
  73,380
Issuance/(repurchase) of shares, $m
  0
  476
  529
  554
  548
  501
  404
  249
  28
  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  
  -362
  6,997
  8,751
  10,675
  12,750
  14,938
  17,195
  19,480
  21,751
  24,237
  26,747
  29,232
  31,676
  34,069
  36,406
  38,688
  40,919
  43,105
  45,257
  47,387
  49,508
  51,633
  53,779
  55,959
  58,189
  60,482
  62,852
  65,315
  67,882
  70,566
  73,380
Total cash flow (excl. dividends), $m
  520
  5,759
  7,248
  8,902
  10,714
  12,661
  14,711
  16,836
  19,007
  21,461
  24,015
  26,602
  29,256
  31,946
  34,666
  37,415
  40,195
  43,009
  45,863
  48,764
  51,723
  54,748
  57,851
  61,043
  64,336
  67,742
  71,273
  74,941
  78,760
  82,741
  86,897
Retained Cash Flow (-), $m
  1
  -1,303
  -1,648
  -2,029
  -2,446
  -2,894
  -3,366
  -3,855
  -4,355
  -4,859
  -5,362
  -5,860
  -6,350
  -6,830
  -7,299
  -7,756
  -8,203
  -8,642
  -9,073
  -9,500
  -9,925
  -10,351
  -10,782
  -11,219
  -11,666
  -12,125
  -12,601
  -13,094
  -13,609
  -14,147
  -14,711
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
 
  4,456
  5,599
  6,873
  8,268
  9,766
  11,345
  12,981
  14,652
  16,602
  18,653
  20,741
  22,905
  25,115
  27,367
  29,659
  31,992
  34,367
  36,790
  39,264
  41,797
  44,396
  47,069
  49,824
  52,670
  55,616
  58,672
  61,847
  65,151
  68,594
  72,186
Discount rate, %
 
  9.00
  9.45
  9.92
  10.42
  10.94
  11.49
  12.06
  12.66
  13.30
  13.96
  14.66
  15.39
  16.16
  16.97
  17.82
  18.71
  19.65
  20.63
  21.66
  22.74
  23.88
  25.07
  26.33
  27.64
  29.03
  30.48
  32.00
  33.60
  35.28
  37.05
PV of cash for distribution, $m
 
  4,088
  4,674
  5,174
  5,562
  5,812
  5,908
  5,850
  5,644
  5,397
  5,048
  4,606
  4,109
  3,582
  3,049
  2,535
  2,057
  1,629
  1,258
  947
  694
  495
  343
  231
  151
  95
  58
  34
  20
  11
  6
Current shareholders' claim on cash, %
  100
  96.4
  93.6
  91.4
  89.9
  88.7
  88.0
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7
  87.7

CenterPoint Energy, Inc. operates as a public utility holding company in the United States. The company’s Electric Transmission & Distribution segment offers electric transmission and distribution services to retail electric providers, municipalities, electric cooperatives, and other distribution companies. As of December 31, 2015, this segment owned 28,474 pole miles of overhead distribution lines and 3,723 circuit miles of overhead transmission lines; 23,120 circuit miles of underground distribution lines and 26 circuit miles of underground transmission lines; and 232 substations with a capacity of 58,674 megavolt amperes. Its Natural Gas Distribution segment sells regulated intrastate natural gas; provides natural gas transportation and storage services for residential, commercial, industrial, and transportation customers; and offers unregulated services comprising residential appliance repair and maintenance services, as well as sells heating, ventilating and air conditioning equipment. This segment owned approximately 74,000 linear miles of natural gas distribution mains. The company’s Energy Services segment provides physical natural gas supplies primarily to commercial and industrial customers, and electric and gas utilities; natural gas management services; and physical delivery services, as well as procures and optimizes transportation and storage assets. It owns and operates approximately 200 miles of intrastate pipelines; and leases transportation capacity on various interstate and intrastate pipelines, and storage. Its Midstream Investments segment provides gathering, processing, compression, treating, dehydration, and natural gas liquids fractionation for producer customers. This segment had approximately 12,400 miles of gathering pipelines, 7,900 miles of interstate pipelines, and approximately 2,300 miles of intrastate pipelines. The company was founded in 1882 and is headquartered in Houston, Texas.

FINANCIAL RATIOS  of  CenterPoint Energy (CNP)

Valuation Ratios
P/E Ratio 28.9
Price to Sales 1.7
Price to Book 3.6
Price to Tangible Book
Price to Cash Flow 6.5
Price to Free Cash Flow 24.3
Growth Rates
Sales Growth Rate 1.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -10.7%
Cap. Spend. - 3 Yr. Gr. Rate 1.9%
Financial Strength
Quick Ratio 1
Current Ratio 0.1
LT Debt to Equity 217.7%
Total Debt to Equity 269%
Interest Coverage 3
Management Effectiveness
Return On Assets 3.2%
Ret/ On Assets - 3 Yr. Avg. 1.8%
Return On Total Capital 3.4%
Ret/ On T. Cap. - 3 Yr. Avg. 0.9%
Return On Equity 12.5%
Return On Equity - 3 Yr. Avg. 3%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 29.5%
EBITDA Margin - 3 Yr. Avg. 19.4%
Operating Margin 12.7%
Oper. Margin - 3 Yr. Avg. 11.8%
Pre-Tax Margin 9.1%
Pre-Tax Margin - 3 Yr. Avg. 1.1%
Net Profit Margin 5.7%
Net Profit Margin - 3 Yr. Avg. 1%
Effective Tax Rate 37%
Eff/ Tax Rate - 3 Yr. Avg. 35.6%
Payout Ratio 102.5%

CNP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CNP stock intrinsic value calculation we used $7528 million for the last fiscal year's total revenue generated by CenterPoint Energy. The default revenue input number comes from 2016 income statement of CenterPoint Energy. 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 CNP stock valuation model: a) initial revenue growth rate of 37.9% 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 9%, whose default value for CNP is calculated based on our internal credit rating of CenterPoint Energy, 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 CenterPoint Energy.
    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 CNP stock the variable cost ratio is equal to 81.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $429 million in the base year in the intrinsic value calculation for CNP 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 4.4% for CenterPoint Energy.

Corporate tax rate of 27% is the nominal tax rate for CenterPoint Energy. 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 CNP 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 CNP are equal to 79%.

Life of production assets of 10 years is the average useful life of capital assets used in CenterPoint Energy 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 CNP is equal to 4.3%. 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 - $3460 million for CenterPoint Energy - 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 439.35 million for CenterPoint Energy 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 CenterPoint Energy at the current share price and the inputted number of shares is $12.7 billion.

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COMPANY NEWS

▶ CenterPoint beats 2Q profit forecasts   [02:36AM  Associated Press]
▶ CenterPoint Energy Stock: 3 Reasons Bulls Are Excited   [Aug-01-17 09:46AM  Motley Fool]
▶ CenterPoint Energy declares $0.2675 quarterly dividend   [Jul-27-17 04:30PM  PR Newswire]
▶ [$$] Meat and fish outperform amid subdued agribusiness   [Jul-24-17 03:19AM  Financial Times]
▶ CenterPoint Energy named a 2017 Most Trusted Brand   [Jul-13-17 05:53PM  PR Newswire]
▶ Where Will CenterPoint Energy Stock Be in 10 Years?   [Jul-11-17 03:08PM  Motley Fool]
▶ [$$] US-Mexico sugar deal brings relief but trade risks remain   [Jun-16-17 08:12AM  Financial Times]
▶ CenterPoint beats 1Q profit forecasts   [06:41AM  Associated Press]
▶ CenterPoint Energy declares $0.2675 quarterly dividend   [Apr-27-17 04:46PM  PR Newswire]
▶ Better Buy: Southern Company vs. CenterPoint Energy   [Feb-22-17 09:48AM  at Motley Fool]
Stock chart of CNP Financial statements of CNP
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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