Intrinsic value of NorthWestern - NWE

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$62.24

  Intrinsic Value

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  Value-price divergence*

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

We calculate the intrinsic value of NWE 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 3.0

 

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, %
  3.54
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  1,257
  1,282
  1,312
  1,345
  1,383
  1,425
  1,471
  1,521
  1,575
  1,634
  1,697
  1,764
  1,835
  1,911
  1,992
  2,078
  2,169
  2,266
  2,368
  2,476
  2,589
  2,709
  2,836
  2,969
  3,110
  3,258
  3,414
  3,578
  3,751
  3,932
  4,123
Variable operating expenses, $m
 
  1,001
  1,023
  1,048
  1,077
  1,108
  1,143
  1,181
  1,221
  1,265
  1,313
  1,327
  1,381
  1,438
  1,499
  1,564
  1,633
  1,705
  1,782
  1,863
  1,949
  2,039
  2,134
  2,235
  2,340
  2,452
  2,569
  2,692
  2,822
  2,959
  3,103
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
  1,011
  1,001
  1,023
  1,048
  1,077
  1,108
  1,143
  1,181
  1,221
  1,265
  1,313
  1,327
  1,381
  1,438
  1,499
  1,564
  1,633
  1,705
  1,782
  1,863
  1,949
  2,039
  2,134
  2,235
  2,340
  2,452
  2,569
  2,692
  2,822
  2,959
  3,103
Operating income, $m
  246
  282
  289
  297
  307
  317
  328
  341
  354
  369
  384
  436
  454
  473
  493
  514
  537
  561
  586
  613
  641
  671
  702
  735
  770
  806
  845
  885
  928
  973
  1,020
EBITDA, $m
  405
  317
  325
  333
  342
  353
  364
  376
  390
  404
  420
  436
  454
  473
  493
  514
  537
  561
  586
  613
  641
  671
  702
  735
  770
  806
  845
  885
  928
  973
  1,020
Interest expense (income), $m
  85
  87
  90
  93
  98
  102
  108
  113
  119
  126
  133
  141
  150
  159
  168
  178
  189
  200
  212
  225
  238
  252
  267
  283
  300
  317
  336
  355
  375
  397
  419
Earnings before tax, $m
  157
  195
  199
  204
  209
  215
  221
  227
  235
  242
  251
  295
  305
  315
  325
  336
  348
  361
  374
  388
  403
  418
  435
  452
  470
  489
  509
  531
  553
  576
  601
Tax expense, $m
  -7
  53
  54
  55
  56
  58
  60
  61
  63
  65
  68
  80
  82
  85
  88
  91
  94
  97
  101
  105
  109
  113
  117
  122
  127
  132
  138
  143
  149
  156
  162
Net income, $m
  164
  142
  145
  149
  153
  157
  161
  166
  171
  177
  183
  215
  222
  230
  237
  245
  254
  263
  273
  283
  294
  305
  317
  330
  343
  357
  372
  387
  404
  421
  439

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  5
  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
  5,499
  5,599
  5,728
  5,875
  6,040
  6,223
  6,424
  6,643
  6,880
  7,135
  7,409
  7,702
  8,014
  8,347
  8,701
  9,076
  9,474
  9,895
  10,340
  10,810
  11,307
  11,831
  12,384
  12,967
  13,581
  14,227
  14,908
  15,624
  16,378
  17,171
  18,006
Adjusted assets (=assets-cash), $m
  5,494
  5,599
  5,728
  5,875
  6,040
  6,223
  6,424
  6,643
  6,880
  7,135
  7,409
  7,702
  8,014
  8,347
  8,701
  9,076
  9,474
  9,895
  10,340
  10,810
  11,307
  11,831
  12,384
  12,967
  13,581
  14,227
  14,908
  15,624
  16,378
  17,171
  18,006
Revenue / Adjusted assets
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
  0.229
Average production assets, $m
  -570
  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
Working capital, $m
  -334
  -37
  -38
  -39
  -40
  -41
  -43
  -44
  -46
  -47
  -49
  -51
  -53
  -55
  -58
  -60
  -63
  -66
  -69
  -72
  -75
  -79
  -82
  -86
  -90
  -94
  -99
  -104
  -109
  -114
  -120
Total debt, $m
  2,120
  2,188
  2,278
  2,380
  2,495
  2,622
  2,762
  2,914
  3,078
  3,256
  3,446
  3,650
  3,867
  4,098
  4,344
  4,605
  4,881
  5,174
  5,483
  5,810
  6,156
  6,520
  6,904
  7,309
  7,735
  8,185
  8,658
  9,156
  9,680
  10,231
  10,811
Total liabilities, $m
  3,823
  3,891
  3,981
  4,083
  4,198
  4,325
  4,465
  4,617
  4,781
  4,959
  5,149
  5,353
  5,570
  5,801
  6,047
  6,308
  6,584
  6,877
  7,186
  7,513
  7,859
  8,223
  8,607
  9,012
  9,438
  9,888
  10,361
  10,859
  11,383
  11,934
  12,514
Total equity, $m
  1,676
  1,708
  1,747
  1,792
  1,842
  1,898
  1,959
  2,026
  2,098
  2,176
  2,260
  2,349
  2,444
  2,546
  2,654
  2,768
  2,890
  3,018
  3,154
  3,297
  3,449
  3,609
  3,777
  3,955
  4,142
  4,339
  4,547
  4,765
  4,995
  5,237
  5,492
Total liabilities and equity, $m
  5,499
  5,599
  5,728
  5,875
  6,040
  6,223
  6,424
  6,643
  6,879
  7,135
  7,409
  7,702
  8,014
  8,347
  8,701
  9,076
  9,474
  9,895
  10,340
  10,810
  11,308
  11,832
  12,384
  12,967
  13,580
  14,227
  14,908
  15,624
  16,378
  17,171
  18,006
Debt-to-equity ratio
  1.265
  1.280
  1.300
  1.330
  1.350
  1.380
  1.410
  1.440
  1.470
  1.500
  1.530
  1.550
  1.580
  1.610
  1.640
  1.660
  1.690
  1.710
  1.740
  1.760
  1.780
  1.810
  1.830
  1.850
  1.870
  1.890
  1.900
  1.920
  1.940
  1.950
  1.970
Adjusted equity ratio
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  164
  142
  145
  149
  153
  157
  161
  166
  171
  177
  183
  215
  222
  230
  237
  245
  254
  263
  273
  283
  294
  305
  317
  330
  343
  357
  372
  387
  404
  421
  439
Depreciation, amort., depletion, $m
  159
  36
  36
  36
  36
  36
  36
  36
  36
  36
  36
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Funds from operations, $m
  258
  178
  181
  185
  188
  192
  197
  202
  207
  213
  219
  215
  222
  230
  237
  245
  254
  263
  273
  283
  294
  305
  317
  330
  343
  357
  372
  387
  404
  421
  439
Change in working capital, $m
  -31
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
Cash from operations, $m
  289
  176
  182
  186
  189
  194
  198
  203
  209
  214
  221
  217
  224
  232
  240
  248
  257
  266
  276
  286
  297
  309
  321
  334
  347
  361
  376
  392
  409
  426
  444
Maintenance CAPEX, $m
  0
  114
  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
New CAPEX, $m
  -288
  -570
  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 investing activities, $m
  -287
  -456
  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
Free cash flow, $m
  2
  -279
  182
  186
  189
  194
  198
  203
  209
  214
  221
  217
  224
  232
  240
  248
  257
  266
  276
  286
  297
  309
  321
  334
  347
  361
  376
  392
  409
  426
  444
Issuance/(repayment) of debt, $m
  95
  73
  89
  102
  115
  127
  140
  152
  165
  177
  190
  204
  217
  231
  246
  261
  276
  293
  309
  327
  345
  364
  384
  405
  427
  449
  473
  498
  524
  551
  580
Issuance/(repurchase) of shares, $m
  -1
  238
  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  
  87
  311
  89
  102
  115
  127
  140
  152
  165
  177
  190
  204
  217
  231
  246
  261
  276
  293
  309
  327
  345
  364
  384
  405
  427
  449
  473
  498
  524
  551
  580
Total cash flow (excl. dividends), $m
  89
  -206
  271
  288
  304
  321
  338
  355
  373
  392
  411
  421
  442
  463
  485
  509
  533
  559
  585
  613
  642
  673
  705
  739
  774
  811
  849
  890
  933
  977
  1,024
Retained Cash Flow (-), $m
  -76
  -32
  -39
  -45
  -50
  -56
  -61
  -67
  -72
  -78
  -84
  -89
  -95
  -102
  -108
  -114
  -121
  -128
  -136
  -143
  -151
  -160
  -169
  -178
  -187
  -197
  -208
  -219
  -230
  -242
  -254
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
 
  0
  232
  243
  254
  265
  277
  289
  301
  314
  327
  332
  346
  362
  378
  394
  412
  430
  450
  470
  491
  513
  536
  561
  587
  614
  642
  671
  703
  735
  770
Discount rate, %
 
  8.90
  9.35
  9.81
  10.30
  10.82
  11.36
  11.93
  12.52
  13.15
  13.81
  14.50
  15.22
  15.98
  16.78
  17.62
  18.50
  19.43
  20.40
  21.42
  22.49
  23.61
  24.80
  26.03
  27.34
  28.70
  30.14
  31.65
  33.23
  34.89
  36.63
PV of cash for distribution, $m
 
  0
  194
  183
  171
  159
  145
  131
  117
  103
  90
  75
  63
  53
  43
  35
  27
  21
  16
  12
  8
  6
  4
  3
  2
  1
  1
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7
  92.7

NorthWestern Corporation, doing business as NorthWestern Energy, provides electricity and natural gas to residential, commercial, and industrial customers in Montana, South Dakota, and Nebraska, the United States. It operates through Electric Operations and Natural Gas Operations segments. The company generates, transmits, and distributes electricity; and produces, stores, transmits, and distributes natural gas, as well as has municipal franchises to purchase, transport, and distribute natural gas. It serves approximately 709,600 customers. The company was founded in 1923 and is based in Sioux Falls, South Dakota.

FINANCIAL RATIOS  of  NorthWestern (NWE)

Valuation Ratios
P/E Ratio 18.3
Price to Sales 2.4
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 10.4
Price to Free Cash Flow 3008.1
Growth Rates
Sales Growth Rate 3.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 1.4%
Cap. Spend. - 3 Yr. Gr. Rate 4.6%
Financial Strength
Quick Ratio 0
Current Ratio 0.1
LT Debt to Equity 108.4%
Total Debt to Equity 126.5%
Interest Coverage 3
Management Effectiveness
Return On Assets 4.7%
Ret/ On Assets - 3 Yr. Avg. 4.5%
Return On Total Capital 4.4%
Ret/ On T. Cap. - 3 Yr. Avg. 4.3%
Return On Equity 10%
Return On Equity - 3 Yr. Avg. 9.8%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 31.9%
EBITDA Margin - 3 Yr. Avg. 30.1%
Operating Margin 19.6%
Oper. Margin - 3 Yr. Avg. 18.8%
Pre-Tax Margin 12.5%
Pre-Tax Margin - 3 Yr. Avg. 12.2%
Net Profit Margin 13%
Net Profit Margin - 3 Yr. Avg. 11.8%
Effective Tax Rate -4.5%
Eff/ Tax Rate - 3 Yr. Avg. 0.7%
Payout Ratio 58.5%

NWE stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the NWE stock intrinsic value calculation we used $1257 million for the last fiscal year's total revenue generated by NorthWestern. The default revenue input number comes from 2016 income statement of NorthWestern. 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 NWE stock valuation model: a) initial revenue growth rate of 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 8.9%, whose default value for NWE is calculated based on our internal credit rating of NorthWestern, 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 NorthWestern.
    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 NWE stock the variable cost ratio is equal to 78.1%.

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 NWE 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 4.1% for NorthWestern.

Corporate tax rate of 27% is the nominal tax rate for NorthWestern. 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 NWE 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 NWE are equal to 0%.

Life of production assets of -1.3 years is the average useful life of capital assets used in NorthWestern 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 NWE is equal to -2.9%. 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 - $1676 million for NorthWestern - 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 48.756 million for NorthWestern 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 NorthWestern at the current share price and the inputted number of shares is $3.0 billion.


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COMPANY NEWS

▶ How Are ETF Inflows Affecting Small Cap Stocks?   [Jun-08-17 03:29PM  Barrons.com]
▶ ETFs with exposure to NorthWestern Corp. : May 1, 2017   [May-01-17 04:13PM  Capital Cube]
▶ NorthWestern Corp. Welcomes New Board Members   [Apr-27-17 12:22PM  PR Newswire]
▶ NorthWestern beats 1Q profit forecasts   [Apr-26-17 07:36PM  Associated Press]
▶ NorthWestern meets 4Q profit forecasts   [Feb-16-17 06:51PM  Associated Press]
▶ Is NorthWestern Corp (NWE) Going To Burn Investors?   [Dec-16-16 10:04PM  at Insider Monkey]
▶ What Smart Money Thinks about Valmont Industries, Inc. (VMI)   [Dec-01-16 12:56PM  at Insider Monkey]
▶ NorthWestern Corp. Value Analysis (NYSE:NWE) : April 22, 2016   [Apr-22-16 01:46PM  at Capital Cube]
Stock chart of NWE Financial statements of NWE Annual reports of NWE
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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