Intrinsic value of California Water Service Group - CWT

Previous Close

$39.20

  Intrinsic Value

$54.64

stock screener

  Rating & Target

buy

+39%

Previous close

$39.20

 
Intrinsic value

$54.64

 
Up/down potential

+39%

 
Rating

buy

We calculate the intrinsic value of CWT 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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

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, %
  3.57
  15.20
  14.18
  13.26
  12.44
  11.69
  11.02
  10.42
  9.88
  9.39
  8.95
  8.56
  8.20
  7.88
  7.59
  7.33
  7.10
  6.89
  6.70
  6.53
  6.38
  6.24
  6.12
  6.00
  5.90
  5.81
  5.73
  5.66
  5.59
  5.53
  5.48
Revenue, $m
  609
  702
  801
  907
  1,020
  1,139
  1,265
  1,397
  1,535
  1,679
  1,829
  1,986
  2,149
  2,318
  2,494
  2,677
  2,867
  3,064
  3,270
  3,483
  3,705
  3,937
  4,177
  4,428
  4,690
  4,962
  5,247
  5,544
  5,854
  6,178
  6,516
Variable operating expenses, $m
 
  501
  572
  648
  728
  813
  903
  997
  1,095
  1,198
  1,305
  1,417
  1,533
  1,654
  1,779
  1,910
  2,046
  2,186
  2,333
  2,485
  2,644
  2,809
  2,981
  3,160
  3,346
  3,541
  3,744
  3,955
  4,177
  4,408
  4,649
Fixed operating expenses, $m
 
  77
  79
  81
  83
  85
  87
  89
  91
  94
  96
  98
  101
  103
  106
  109
  111
  114
  117
  120
  123
  126
  129
  132
  136
  139
  143
  146
  150
  153
  157
Total operating expenses, $m
  508
  578
  651
  729
  811
  898
  990
  1,086
  1,186
  1,292
  1,401
  1,515
  1,634
  1,757
  1,885
  2,019
  2,157
  2,300
  2,450
  2,605
  2,767
  2,935
  3,110
  3,292
  3,482
  3,680
  3,887
  4,101
  4,327
  4,561
  4,806
Operating income, $m
  101
  124
  150
  179
  209
  241
  275
  311
  348
  387
  428
  470
  515
  561
  609
  658
  710
  764
  820
  878
  939
  1,002
  1,068
  1,136
  1,208
  1,283
  1,361
  1,442
  1,527
  1,616
  1,710
EBITDA, $m
  166
  145
  175
  207
  240
  276
  314
  353
  395
  438
  484
  531
  580
  631
  684
  740
  797
  857
  919
  984
  1,051
  1,122
  1,195
  1,271
  1,350
  1,433
  1,520
  1,611
  1,705
  1,804
  1,908
Interest expense (income), $m
  28
  30
  42
  55
  69
  85
  100
  117
  135
  153
  172
  192
  213
  235
  258
  281
  306
  331
  357
  385
  413
  443
  474
  506
  539
  574
  611
  649
  688
  730
  773
Earnings before tax, $m
  75
  94
  108
  124
  140
  157
  175
  194
  213
  234
  255
  278
  301
  326
  351
  377
  404
  433
  462
  493
  525
  559
  594
  630
  669
  708
  750
  794
  839
  887
  937
Tax expense, $m
  26
  25
  29
  33
  38
  42
  47
  52
  58
  63
  69
  75
  81
  88
  95
  102
  109
  117
  125
  133
  142
  151
  160
  170
  181
  191
  203
  214
  227
  239
  253
Net income, $m
  49
  69
  79
  90
  102
  114
  128
  141
  156
  171
  186
  203
  220
  238
  256
  275
  295
  316
  338
  360
  384
  408
  434
  460
  488
  517
  548
  579
  613
  647
  684

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  25
  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
  2,412
  2,751
  3,141
  3,558
  4,000
  4,468
  4,961
  5,478
  6,019
  6,584
  7,173
  7,787
  8,426
  9,090
  9,780
  10,497
  11,242
  12,017
  12,822
  13,660
  14,531
  15,438
  16,382
  17,366
  18,391
  19,460
  20,575
  21,740
  22,956
  24,226
  25,554
Adjusted assets (=assets-cash), $m
  2,387
  2,751
  3,141
  3,558
  4,000
  4,468
  4,961
  5,478
  6,019
  6,584
  7,173
  7,787
  8,426
  9,090
  9,780
  10,497
  11,242
  12,017
  12,822
  13,660
  14,531
  15,438
  16,382
  17,366
  18,391
  19,460
  20,575
  21,740
  22,956
  24,226
  25,554
Revenue / Adjusted assets
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
Average production assets, $m
  93
  107
  122
  138
  155
  173
  192
  212
  233
  255
  278
  302
  327
  352
  379
  407
  436
  466
  497
  529
  563
  598
  635
  673
  713
  754
  798
  843
  890
  939
  990
Working capital, $m
  -108
  -11
  -13
  -15
  -16
  -18
  -20
  -22
  -25
  -27
  -29
  -32
  -34
  -37
  -40
  -43
  -46
  -49
  -52
  -56
  -59
  -63
  -67
  -71
  -75
  -79
  -84
  -89
  -94
  -99
  -104
Total debt, $m
  655
  894
  1,176
  1,478
  1,798
  2,137
  2,494
  2,868
  3,260
  3,669
  4,096
  4,540
  5,002
  5,483
  5,983
  6,502
  7,042
  7,602
  8,185
  8,792
  9,422
  10,079
  10,762
  11,475
  12,217
  12,991
  13,799
  14,642
  15,522
  16,442
  17,403
Total liabilities, $m
  1,752
  1,992
  2,274
  2,576
  2,896
  3,235
  3,592
  3,966
  4,358
  4,767
  5,194
  5,638
  6,100
  6,581
  7,081
  7,600
  8,140
  8,700
  9,283
  9,890
  10,520
  11,177
  11,860
  12,573
  13,315
  14,089
  14,897
  15,740
  16,620
  17,540
  18,501
Total equity, $m
  659
  759
  867
  982
  1,104
  1,233
  1,369
  1,512
  1,661
  1,817
  1,980
  2,149
  2,326
  2,509
  2,699
  2,897
  3,103
  3,317
  3,539
  3,770
  4,011
  4,261
  4,521
  4,793
  5,076
  5,371
  5,679
  6,000
  6,336
  6,686
  7,053
Total liabilities and equity, $m
  2,411
  2,751
  3,141
  3,558
  4,000
  4,468
  4,961
  5,478
  6,019
  6,584
  7,174
  7,787
  8,426
  9,090
  9,780
  10,497
  11,243
  12,017
  12,822
  13,660
  14,531
  15,438
  16,381
  17,366
  18,391
  19,460
  20,576
  21,740
  22,956
  24,226
  25,554
Debt-to-equity ratio
  0.994
  1.180
  1.360
  1.510
  1.630
  1.730
  1.820
  1.900
  1.960
  2.020
  2.070
  2.110
  2.150
  2.190
  2.220
  2.240
  2.270
  2.290
  2.310
  2.330
  2.350
  2.370
  2.380
  2.390
  2.410
  2.420
  2.430
  2.440
  2.450
  2.460
  2.470
Adjusted equity ratio
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276
  0.276

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  49
  69
  79
  90
  102
  114
  128
  141
  156
  171
  186
  203
  220
  238
  256
  275
  295
  316
  338
  360
  384
  408
  434
  460
  488
  517
  548
  579
  613
  647
  684
Depreciation, amort., depletion, $m
  65
  22
  25
  28
  31
  35
  39
  43
  47
  51
  56
  60
  65
  70
  76
  81
  87
  93
  99
  106
  113
  120
  127
  135
  143
  151
  160
  169
  178
  188
  198
Funds from operations, $m
  167
  90
  104
  118
  133
  149
  166
  184
  203
  222
  242
  263
  285
  308
  332
  357
  382
  409
  437
  466
  496
  528
  561
  595
  631
  668
  707
  748
  791
  835
  882
Change in working capital, $m
  7
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
Cash from operations, $m
  160
  92
  105
  120
  135
  151
  168
  186
  205
  224
  245
  266
  288
  311
  335
  360
  385
  412
  440
  469
  500
  531
  564
  599
  635
  672
  712
  753
  795
  840
  887
Maintenance CAPEX, $m
  0
  -19
  -21
  -24
  -28
  -31
  -35
  -38
  -42
  -47
  -51
  -56
  -60
  -65
  -70
  -76
  -81
  -87
  -93
  -99
  -106
  -113
  -120
  -127
  -135
  -143
  -151
  -160
  -169
  -178
  -188
New CAPEX, $m
  -229
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -32
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -45
  -47
  -49
  -51
Cash from investing activities, $m
  -231
  -33
  -36
  -40
  -45
  -49
  -54
  -58
  -63
  -69
  -74
  -80
  -85
  -91
  -97
  -104
  -110
  -117
  -124
  -131
  -140
  -148
  -157
  -165
  -175
  -184
  -194
  -205
  -216
  -227
  -239
Free cash flow, $m
  -71
  59
  69
  79
  90
  102
  115
  128
  141
  156
  171
  186
  203
  220
  238
  256
  275
  295
  316
  338
  360
  384
  408
  434
  460
  488
  518
  548
  580
  613
  648
Issuance/(repayment) of debt, $m
  106
  264
  282
  302
  320
  339
  357
  374
  392
  409
  427
  444
  462
  481
  500
  519
  540
  561
  583
  606
  631
  656
  684
  712
  742
  774
  808
  843
  880
  920
  961
Issuance/(repurchase) of shares, $m
  0
  32
  29
  25
  20
  15
  8
  1
  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  
  121
  296
  311
  327
  340
  354
  365
  375
  392
  409
  427
  444
  462
  481
  500
  519
  540
  561
  583
  606
  631
  656
  684
  712
  742
  774
  808
  843
  880
  920
  961
Total cash flow (excl. dividends), $m
  50
  355
  380
  406
  431
  455
  480
  503
  533
  565
  598
  631
  665
  701
  737
  775
  815
  856
  899
  944
  991
  1,040
  1,092
  1,146
  1,203
  1,262
  1,325
  1,391
  1,460
  1,533
  1,609
Retained Cash Flow (-), $m
  -17
  -100
  -108
  -115
  -122
  -129
  -136
  -143
  -149
  -156
  -163
  -169
  -176
  -183
  -190
  -198
  -206
  -214
  -222
  -231
  -240
  -250
  -261
  -271
  -283
  -295
  -308
  -321
  -336
  -351
  -366
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
 
  254
  272
  291
  309
  326
  344
  361
  384
  409
  435
  461
  489
  517
  547
  577
  609
  642
  677
  713
  750
  790
  831
  874
  920
  967
  1,017
  1,070
  1,125
  1,182
  1,243
Discount rate, %
 
  7.50
  7.88
  8.27
  8.68
  9.12
  9.57
  10.05
  10.55
  11.08
  11.63
  12.22
  12.83
  13.47
  14.14
  14.85
  15.59
  16.37
  17.19
  18.05
  18.95
  19.90
  20.89
  21.94
  23.04
  24.19
  25.40
  26.67
  28.00
  29.40
  30.87
PV of cash for distribution, $m
 
  237
  234
  229
  221
  211
  199
  184
  172
  159
  145
  130
  115
  100
  86
  72
  60
  49
  39
  30
  23
  17
  13
  9
  6
  4
  3
  2
  1
  1
  0
Current shareholders' claim on cash, %
  100
  98.4
  97.1
  96.1
  95.4
  95.0
  94.8
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7
  94.7

California Water Service Group is a holding company. The Company operates through the supply and distribution of water and providing water-related utility services segment. The Company, through its subsidiaries, provides non-regulated services and non-regulated services to private companies and municipalities. The bulk of the business consists of the production, purchase, storage, treatment, testing, distribution and sale of water for domestic, industrial, public and irrigation uses, and for fire protection. It also provides non-regulated water-related services. The non-regulated services include water system operation, billing and meter reading services. Non-regulated operations also include the lease of communication antenna sites, lab services and promotion of other non-regulated services. The Company under its non-regulated contract arrangements, operates municipally owned water systems, privately owned water and recycled water distribution systems.

FINANCIAL RATIOS  of  California Water Service Group (CWT)

Valuation Ratios
P/E Ratio 38.4
Price to Sales 3.1
Price to Book 2.9
Price to Tangible Book
Price to Cash Flow 11.8
Price to Free Cash Flow -27.3
Growth Rates
Sales Growth Rate 3.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 29.4%
Cap. Spend. - 3 Yr. Gr. Rate 13.2%
Financial Strength
Quick Ratio 0
Current Ratio 0.3
LT Debt to Equity 80.7%
Total Debt to Equity 99.4%
Interest Coverage 4
Management Effectiveness
Return On Assets 2.9%
Ret/ On Assets - 3 Yr. Avg. 3%
Return On Total Capital 3.9%
Ret/ On T. Cap. - 3 Yr. Avg. 4.3%
Return On Equity 7.5%
Return On Equity - 3 Yr. Avg. 8%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 27.6%
EBITDA Margin - 3 Yr. Avg. 27.6%
Operating Margin 16.6%
Oper. Margin - 3 Yr. Avg. 17%
Pre-Tax Margin 12.3%
Pre-Tax Margin - 3 Yr. Avg. 12.8%
Net Profit Margin 8%
Net Profit Margin - 3 Yr. Avg. 8.4%
Effective Tax Rate 34.7%
Eff/ Tax Rate - 3 Yr. Avg. 34.4%
Payout Ratio 67.3%

CWT stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CWT stock intrinsic value calculation we used $609 million for the last fiscal year's total revenue generated by California Water Service Group. The default revenue input number comes from 2016 income statement of California Water Service Group. 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 CWT stock valuation model: a) initial revenue growth rate of 15.2% 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 7.5%, whose default value for CWT is calculated based on our internal credit rating of California Water Service Group, 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 California Water Service Group.
    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 CWT stock the variable cost ratio is equal to 71.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $75 million in the base year in the intrinsic value calculation for CWT 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 4.7% for California Water Service Group.

Corporate tax rate of 27% is the nominal tax rate for California Water Service Group. 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 CWT 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 CWT are equal to 15.2%.

Life of production assets of 1.5 years is the average useful life of capital assets used in California Water Service Group 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 CWT is equal to -1.6%. 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 - $659 million for California Water Service Group - 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 48.071 million for California Water Service Group 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 California Water Service Group at the current share price and the inputted number of shares is $1.9 billion.

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COMPANY NEWS

▶ 1 Top Water Stock to Buy Now   [10:36AM  Motley Fool]
▶ Tiny, Mighty Dividend Stocks   [Nov-01-17 06:40PM  Motley Fool]
▶ California Water Service Group posts 3Q profit   [09:24AM  Associated Press]
▶ California Water Service Group posts 2Q profit   [01:32AM  Associated Press]
▶ California Water Service Group posts 1Q profit   [Apr-27-17 08:54AM  Associated Press]
▶ HNA Group Plans to Acquire CWT for $1 Billion   [Apr-09-17 08:48PM  Bloomberg]
▶ [$$] Rains Expose a New Water Problem in California: Storage   [Mar-07-17 12:57AM  The Wall Street Journal]
▶ [$$] An End to Californias Drought Isnt Cut and Dried   [Mar-03-17 11:09PM  The Wall Street Journal]
▶ [$$] Californias Dams Set to Face New Stress Tests   [Feb-21-17 12:37AM  at The Wall Street Journal]
▶ Top Water Stocks to Buy in 2017 -- and the Ones to Avoid   [Jan-27-17 06:27PM  at Motley Fool]
Financial statements of CWT
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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