Intrinsic value of Connecticut Water Service - CTWS

Previous Close

$63.19

  Intrinsic Value

$31.50

stock screener

  Rating & Target

str. sell

-50%

Previous close

$63.19

 
Intrinsic value

$31.50

 
Up/down potential

-50%

 
Rating

str. sell

We calculate the intrinsic value of CTWS 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 0.7

 

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, %
  3.13
  7.70
  7.43
  7.19
  6.97
  6.77
  6.59
  6.43
  6.29
  6.16
  6.05
  5.94
  5.85
  5.76
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.36
  5.33
  5.30
  5.27
  5.24
  5.22
  5.19
  5.17
  5.16
  5.14
  5.13
Revenue, $m
  99
  107
  115
  123
  131
  140
  149
  159
  169
  180
  190
  202
  213
  226
  239
  252
  266
  281
  296
  312
  329
  346
  365
  384
  404
  425
  447
  470
  494
  520
  546
Variable operating expenses, $m
 
  76
  82
  87
  93
  99
  106
  112
  119
  126
  134
  138
  147
  155
  164
  173
  183
  193
  203
  214
  226
  238
  250
  264
  277
  292
  307
  323
  339
  357
  375
Fixed operating expenses, $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
Total operating expenses, $m
  67
  76
  82
  87
  93
  99
  106
  112
  119
  126
  134
  138
  147
  155
  164
  173
  183
  193
  203
  214
  226
  238
  250
  264
  277
  292
  307
  323
  339
  357
  375
Operating income, $m
  32
  30
  33
  35
  38
  41
  44
  47
  50
  53
  57
  63
  67
  71
  75
  79
  83
  88
  93
  98
  103
  108
  114
  120
  127
  133
  140
  147
  155
  163
  171
EBITDA, $m
  45
  40
  42
  46
  49
  52
  55
  59
  63
  67
  71
  75
  79
  84
  89
  93
  99
  104
  110
  116
  122
  128
  135
  142
  150
  158
  166
  174
  183
  193
  203
Interest expense (income), $m
  7
  8
  10
  11
  13
  14
  16
  18
  20
  22
  24
  26
  28
  30
  33
  35
  38
  41
  43
  46
  49
  53
  56
  60
  63
  67
  71
  76
  80
  85
  90
Earnings before tax, $m
  26
  22
  23
  24
  25
  26
  28
  29
  30
  31
  33
  37
  39
  40
  42
  44
  46
  47
  49
  51
  54
  56
  58
  61
  63
  66
  69
  72
  75
  78
  82
Tax expense, $m
  3
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
Net income, $m
  23
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  27
  28
  29
  31
  32
  33
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  55
  57
  60

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2
  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
  785
  846
  909
  974
  1,042
  1,113
  1,186
  1,263
  1,342
  1,425
  1,511
  1,601
  1,694
  1,792
  1,894
  2,000
  2,111
  2,227
  2,349
  2,476
  2,609
  2,748
  2,893
  3,045
  3,205
  3,372
  3,547
  3,731
  3,923
  4,125
  4,337
Adjusted assets (=assets-cash), $m
  783
  846
  909
  974
  1,042
  1,113
  1,186
  1,263
  1,342
  1,425
  1,511
  1,601
  1,694
  1,792
  1,894
  2,000
  2,111
  2,227
  2,349
  2,476
  2,609
  2,748
  2,893
  3,045
  3,205
  3,372
  3,547
  3,731
  3,923
  4,125
  4,337
Revenue / Adjusted assets
  0.126
  0.126
  0.127
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
  0.126
Average production assets, $m
  29
  31
  33
  35
  38
  40
  43
  46
  49
  52
  55
  58
  61
  65
  69
  73
  77
  81
  85
  90
  95
  100
  105
  111
  116
  122
  129
  135
  142
  150
  157
Working capital, $m
  -26
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  24
  25
  27
  28
  30
  32
  33
  35
  37
  39
  41
  43
  45
  47
  50
  52
  55
Total debt, $m
  235
  277
  321
  366
  414
  463
  514
  567
  622
  680
  740
  803
  868
  936
  1,007
  1,081
  1,159
  1,240
  1,324
  1,413
  1,505
  1,602
  1,704
  1,810
  1,921
  2,037
  2,159
  2,287
  2,422
  2,562
  2,710
Total liabilities, $m
  548
  590
  634
  679
  727
  776
  827
  880
  935
  993
  1,053
  1,116
  1,181
  1,249
  1,320
  1,394
  1,472
  1,553
  1,637
  1,726
  1,818
  1,915
  2,017
  2,123
  2,234
  2,350
  2,472
  2,600
  2,735
  2,875
  3,023
Total equity, $m
  237
  256
  275
  295
  316
  337
  359
  383
  407
  432
  458
  485
  513
  543
  574
  606
  640
  675
  712
  750
  790
  833
  877
  923
  971
  1,022
  1,075
  1,130
  1,189
  1,250
  1,314
Total liabilities and equity, $m
  785
  846
  909
  974
  1,043
  1,113
  1,186
  1,263
  1,342
  1,425
  1,511
  1,601
  1,694
  1,792
  1,894
  2,000
  2,112
  2,228
  2,349
  2,476
  2,608
  2,748
  2,894
  3,046
  3,205
  3,372
  3,547
  3,730
  3,924
  4,125
  4,337
Debt-to-equity ratio
  0.992
  1.080
  1.160
  1.240
  1.310
  1.370
  1.430
  1.480
  1.530
  1.580
  1.620
  1.650
  1.690
  1.720
  1.750
  1.780
  1.810
  1.840
  1.860
  1.880
  1.900
  1.920
  1.940
  1.960
  1.980
  1.990
  2.010
  2.020
  2.040
  2.050
  2.060
Adjusted equity ratio
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303
  0.303

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  23
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  27
  28
  29
  31
  32
  33
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  55
  57
  60
Depreciation, amort., depletion, $m
  13
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  12
  12
  13
  14
  15
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
Funds from operations, $m
  28
  25
  27
  28
  29
  30
  32
  33
  35
  36
  38
  39
  41
  42
  44
  46
  49
  51
  53
  55
  58
  61
  63
  66
  69
  73
  76
  79
  83
  87
  91
Change in working capital, $m
  -5
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
Cash from operations, $m
  33
  25
  26
  27
  28
  29
  31
  32
  34
  35
  37
  38
  39
  41
  43
  45
  47
  49
  52
  54
  56
  59
  62
  64
  67
  70
  74
  77
  81
  84
  88
Maintenance CAPEX, $m
  0
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -30
New CAPEX, $m
  -67
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
Cash from investing activities, $m
  -66
  -8
  -8
  -9
  -9
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -19
  -20
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -30
  -33
  -34
  -35
  -38
Free cash flow, $m
  -33
  17
  17
  18
  19
  19
  20
  21
  22
  23
  23
  23
  24
  25
  26
  27
  29
  30
  31
  32
  34
  35
  36
  38
  39
  41
  43
  45
  47
  49
  51
Issuance/(repayment) of debt, $m
  44
  44
  44
  46
  47
  49
  51
  53
  55
  58
  60
  63
  65
  68
  71
  74
  77
  81
  85
  88
  93
  97
  101
  106
  111
  117
  122
  128
  134
  141
  147
Issuance/(repurchase) of shares, $m
  2
  3
  2
  2
  2
  2
  2
  2
  2
  2
  2
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  2
  2
  2
  3
  3
  3
  4
  4
  5
Cash from financing (excl. dividends), $m  
  46
  47
  46
  48
  49
  51
  53
  55
  57
  60
  62
  63
  65
  68
  71
  74
  77
  82
  86
  89
  94
  98
  103
  108
  113
  120
  125
  131
  138
  145
  152
Total cash flow (excl. dividends), $m
  14
  64
  63
  66
  68
  71
  73
  76
  79
  82
  86
  86
  90
  94
  98
  102
  106
  111
  116
  122
  127
  133
  139
  146
  153
  160
  168
  176
  184
  193
  203
Retained Cash Flow (-), $m
  -12
  -19
  -19
  -20
  -21
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -32
  -34
  -35
  -37
  -38
  -40
  -42
  -44
  -46
  -48
  -51
  -53
  -56
  -58
  -61
  -64
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
 
  44
  44
  46
  47
  49
  51
  53
  55
  57
  59
  59
  61
  64
  67
  70
  73
  76
  80
  83
  87
  91
  95
  100
  105
  110
  115
  120
  126
  132
  139
Discount rate, %
 
  8.20
  8.61
  9.04
  9.49
  9.97
  10.47
  10.99
  11.54
  12.12
  12.72
  13.36
  14.02
  14.73
  15.46
  16.24
  17.05
  17.90
  18.79
  19.73
  20.72
  21.76
  22.84
  23.99
  25.19
  26.45
  27.77
  29.16
  30.61
  32.15
  33.75
PV of cash for distribution, $m
 
  41
  37
  35
  33
  31
  28
  26
  23
  20
  18
  15
  13
  11
  9
  7
  6
  5
  4
  3
  2
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  99.6
  99.3
  99.1
  98.8
  98.6
  98.4
  98.2
  98.1
  97.9
  97.8
  97.8
  97.8
  97.7
  97.7
  97.7
  97.7
  97.7
  97.6
  97.6
  97.5
  97.5
  97.4
  97.3
  97.3
  97.2
  97.1
  97.0
  96.9
  96.8
  96.7

Connecticut Water Service, Inc. is a non-operating holding company. The Company's income is derived from the earnings of its subsidiary companies, including The Connecticut Water Company (Connecticut Water), The Maine Water Company (Maine Water), New England Water Utility Services, Inc. (NEWUS),The Avon Water Company (AWC) and Chester Realty Company (Chester Realty). It operates through three segments: Water Operations, Real Estate Transactions, and Services and Rentals. The Water Activities segment consists of its regulated water activities to supply public drinking water to customers. The Real Estate Transactions segment involves the sale or donation for income tax benefits of its real estate holdings. Services and Rentals segment provides contracted services to water and wastewater utilities and other clients, and also leases certain of the Company's properties to third parties through unregulated companies in the State of Connecticut and through Maine Water in the State of Maine.

FINANCIAL RATIOS  of  Connecticut Water Service (CTWS)

Valuation Ratios
P/E Ratio 30.9
Price to Sales 7.2
Price to Book 3
Price to Tangible Book
Price to Cash Flow 21.5
Price to Free Cash Flow -20.9
Growth Rates
Sales Growth Rate 3.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 39.6%
Cap. Spend. - 3 Yr. Gr. Rate 15.2%
Financial Strength
Quick Ratio 0
Current Ratio 0.1
LT Debt to Equity 83.1%
Total Debt to Equity 99.2%
Interest Coverage 5
Management Effectiveness
Return On Assets 3.9%
Ret/ On Assets - 3 Yr. Avg. 4.1%
Return On Total Capital 5.2%
Ret/ On T. Cap. - 3 Yr. Avg. 5.4%
Return On Equity 10%
Return On Equity - 3 Yr. Avg. 10.3%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 46.5%
EBITDA Margin - 3 Yr. Avg. 45.7%
Operating Margin 32.3%
Oper. Margin - 3 Yr. Avg. 30.8%
Pre-Tax Margin 26.3%
Pre-Tax Margin - 3 Yr. Avg. 25.3%
Net Profit Margin 23.2%
Net Profit Margin - 3 Yr. Avg. 23.2%
Effective Tax Rate 11.5%
Eff/ Tax Rate - 3 Yr. Avg. 7.7%
Payout Ratio 56.5%

CTWS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CTWS stock intrinsic value calculation we used $99 million for the last fiscal year's total revenue generated by Connecticut Water Service. The default revenue input number comes from 2016 income statement of Connecticut Water Service. 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 CTWS stock valuation model: a) initial revenue growth rate of 7.7% 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 8.2%, whose default value for CTWS is calculated based on our internal credit rating of Connecticut Water Service, 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 Connecticut Water Service.
    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 CTWS stock the variable cost ratio is equal to 71.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for CTWS 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 3.5% for Connecticut Water Service.

Corporate tax rate of 27% is the nominal tax rate for Connecticut Water Service. 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 CTWS 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 CTWS are equal to 28.8%.

Life of production assets of 4.5 years is the average useful life of capital assets used in Connecticut Water Service 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 CTWS is equal to 10.1%. 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 - $237 million for Connecticut Water Service - 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 11.575 million for Connecticut Water Service 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 Connecticut Water Service at the current share price and the inputted number of shares is $0.7 billion.

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COMPANY NEWS

▶ Connecticut Water Service, Inc. Declares Dividends   [Aug-14-17 11:15AM  GlobeNewswire]
▶ Connecticut Water Service posts 2Q profit   [Aug-08-17 11:55PM  Associated Press]
▶ Connecticut Water Service posts 1Q profit   [May-08-17 03:01PM  Associated Press]
▶ Maine Water president retires, Knowlton named replacement   [Mar-30-17 11:00AM  GlobeNewswire]
▶ Connecticut Water Service posts 4Q profit   [Mar-13-17 03:20PM  Associated Press]
▶ Is Connecticut Water Service Inc (CTWS) A Good Stock To Buy?   [Dec-19-16 07:30AM  at Insider Monkey]
▶ Avon Water Company to join Connecticut Water   [Oct-12-16 08:16AM  GlobeNewswire]
Financial statements of CTWS
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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