Intrinsic value of Southern - SO

Previous Close

$47.32

  Intrinsic Value

$308.30

stock screener

  Rating & Target

str. buy

+552%

  Value-price divergence*

+1989%

Previous close

$47.32

 
Intrinsic value

$308.30

 
Up/down potential

+552%

 
Rating

str. buy

 
Value-price divergence*

+1989%

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

We calculate the intrinsic value of SO 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 46.9

 

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, %
  13.76
  44.60
  40.64
  37.08
  33.87
  30.98
  28.38
  26.05
  23.94
  22.05
  20.34
  18.81
  17.43
  16.18
  15.07
  14.06
  13.15
  12.34
  11.60
  10.94
  10.35
  9.81
  9.33
  8.90
  8.51
  8.16
  7.84
  7.56
  7.30
  7.07
  6.87
Revenue, $m
  19,454
  28,770
  40,462
  55,463
  74,248
  97,251
  124,854
  157,372
  195,048
  238,049
  286,472
  340,351
  399,664
  464,346
  534,304
  609,423
  689,582
  774,662
  864,555
  959,170
  1,058,438
  1,162,317
  1,270,796
  1,383,893
  1,501,659
  1,624,176
  1,751,558
  1,883,951
  2,021,531
  2,164,502
  2,313,100
Variable operating expenses, $m
 
  21,442
  29,902
  40,757
  54,349
  70,994
  90,967
  114,497
  141,758
  172,873
  207,911
  246,272
  289,189
  335,992
  386,612
  440,967
  498,969
  560,531
  625,576
  694,038
  765,866
  841,032
  919,525
  1,001,360
  1,086,573
  1,175,224
  1,267,395
  1,363,192
  1,462,742
  1,566,194
  1,673,717
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
  15,267
  21,442
  29,902
  40,757
  54,349
  70,994
  90,967
  114,497
  141,758
  172,873
  207,911
  246,272
  289,189
  335,992
  386,612
  440,967
  498,969
  560,531
  625,576
  694,038
  765,866
  841,032
  919,525
  1,001,360
  1,086,573
  1,175,224
  1,267,395
  1,363,192
  1,462,742
  1,566,194
  1,673,717
Operating income, $m
  4,629
  7,327
  10,559
  14,706
  19,898
  26,257
  33,887
  42,875
  53,290
  65,176
  78,561
  94,079
  110,474
  128,354
  147,691
  168,456
  190,613
  214,131
  238,979
  265,132
  292,572
  321,286
  351,271
  382,534
  415,086
  448,952
  484,163
  520,759
  558,788
  598,308
  639,383
EBITDA, $m
  7,552
  9,351
  13,151
  18,027
  24,132
  31,608
  40,580
  51,149
  63,394
  77,370
  93,109
  110,620
  129,898
  150,921
  173,659
  198,074
  224,127
  251,779
  280,996
  311,748
  344,012
  377,775
  413,032
  449,791
  488,067
  527,887
  569,288
  612,319
  657,035
  703,503
  751,800
Interest expense (income), $m
  1,100
  1,592
  2,867
  4,554
  6,720
  9,431
  12,752
  16,736
  21,430
  26,869
  33,076
  40,066
  47,844
  56,406
  65,743
  75,841
  86,685
  98,256
  110,537
  123,513
  137,171
  151,500
  166,496
  182,155
  198,480
  215,480
  233,166
  251,553
  270,664
  290,524
  311,162
Earnings before tax, $m
  3,480
  5,735
  7,693
  10,152
  13,179
  16,825
  21,135
  26,139
  31,859
  38,307
  45,485
  54,013
  62,631
  71,948
  81,949
  92,615
  103,928
  115,875
  128,442
  141,619
  155,401
  169,785
  184,776
  200,379
  216,606
  233,472
  250,997
  269,205
  288,124
  307,784
  328,221
Tax expense, $m
  951
  1,549
  2,077
  2,741
  3,558
  4,543
  5,706
  7,058
  8,602
  10,343
  12,281
  14,584
  16,910
  19,426
  22,126
  25,006
  28,061
  31,286
  34,679
  38,237
  41,958
  45,842
  49,889
  54,102
  58,484
  63,037
  67,769
  72,685
  77,793
  83,102
  88,620
Net income, $m
  2,493
  4,187
  5,616
  7,411
  9,620
  12,283
  15,428
  19,081
  23,257
  27,964
  33,204
  39,430
  45,720
  52,522
  59,823
  67,609
  75,868
  84,589
  93,763
  103,382
  113,442
  123,943
  134,886
  146,277
  158,122
  170,434
  183,228
  196,520
  210,330
  224,682
  239,601

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,975
  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
  109,697
  155,511
  218,711
  299,801
  401,338
  525,679
  674,885
  850,659
  1,054,312
  1,286,751
  1,548,499
  1,839,736
  2,160,345
  2,509,980
  2,888,128
  3,294,176
  3,727,468
  4,187,362
  4,673,270
  5,184,701
  5,721,285
  6,282,797
  6,869,170
  7,480,505
  8,117,075
  8,779,327
  9,467,879
  10,183,517
  10,927,192
  11,700,013
  12,503,243
Adjusted assets (=assets-cash), $m
  107,722
  155,511
  218,711
  299,801
  401,338
  525,679
  674,885
  850,659
  1,054,312
  1,286,751
  1,548,499
  1,839,736
  2,160,345
  2,509,980
  2,888,128
  3,294,176
  3,727,468
  4,187,362
  4,673,270
  5,184,701
  5,721,285
  6,282,797
  6,869,170
  7,480,505
  8,117,075
  8,779,327
  9,467,879
  10,183,517
  10,927,192
  11,700,013
  12,503,243
Revenue / Adjusted assets
  0.181
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
  0.185
Average production assets, $m
  9,673
  13,982
  19,664
  26,955
  36,084
  47,264
  60,679
  76,483
  94,793
  115,692
  139,226
  165,411
  194,237
  225,672
  259,672
  296,179
  335,137
  376,486
  420,174
  466,156
  514,401
  564,886
  617,607
  672,572
  729,806
  789,349
  851,257
  915,600
  982,464
  1,051,948
  1,124,167
Working capital, $m
  -3,195
  -489
  -688
  -943
  -1,262
  -1,653
  -2,123
  -2,675
  -3,316
  -4,047
  -4,870
  -5,786
  -6,794
  -7,894
  -9,083
  -10,360
  -11,723
  -13,169
  -14,697
  -16,306
  -17,993
  -19,759
  -21,604
  -23,526
  -25,528
  -27,611
  -29,776
  -32,027
  -34,366
  -36,797
  -39,323
Total debt, $m
  47,457
  81,900
  130,122
  191,993
  269,466
  364,338
  478,182
  612,298
  767,685
  945,036
  1,144,750
  1,366,964
  1,611,588
  1,878,360
  2,166,887
  2,476,701
  2,807,303
  3,158,202
  3,528,950
  3,919,172
  4,328,586
  4,757,019
  5,204,422
  5,670,870
  6,156,574
  6,661,872
  7,187,237
  7,733,269
  8,300,692
  8,890,355
  9,503,220
Total liabilities, $m
  84,212
  118,655
  166,877
  228,748
  306,221
  401,093
  514,937
  649,053
  804,440
  981,791
  1,181,505
  1,403,719
  1,648,343
  1,915,115
  2,203,642
  2,513,456
  2,844,058
  3,194,957
  3,565,705
  3,955,927
  4,365,341
  4,793,774
  5,241,177
  5,707,625
  6,193,329
  6,698,627
  7,223,992
  7,770,024
  8,337,447
  8,927,110
  9,539,975
Total equity, $m
  25,485
  36,856
  51,835
  71,053
  95,117
  124,586
  159,948
  201,606
  249,872
  304,960
  366,994
  436,017
  512,002
  594,865
  684,486
  780,720
  883,410
  992,405
  1,107,565
  1,228,774
  1,355,945
  1,489,023
  1,627,993
  1,772,880
  1,923,747
  2,080,701
  2,243,887
  2,413,494
  2,589,744
  2,772,903
  2,963,269
Total liabilities and equity, $m
  109,697
  155,511
  218,712
  299,801
  401,338
  525,679
  674,885
  850,659
  1,054,312
  1,286,751
  1,548,499
  1,839,736
  2,160,345
  2,509,980
  2,888,128
  3,294,176
  3,727,468
  4,187,362
  4,673,270
  5,184,701
  5,721,286
  6,282,797
  6,869,170
  7,480,505
  8,117,076
  8,779,328
  9,467,879
  10,183,518
  10,927,191
  11,700,013
  12,503,244
Debt-to-equity ratio
  1.862
  2.220
  2.510
  2.700
  2.830
  2.920
  2.990
  3.040
  3.070
  3.100
  3.120
  3.140
  3.150
  3.160
  3.170
  3.170
  3.180
  3.180
  3.190
  3.190
  3.190
  3.190
  3.200
  3.200
  3.200
  3.200
  3.200
  3.200
  3.210
  3.210
  3.210
Adjusted equity ratio
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,493
  4,187
  5,616
  7,411
  9,620
  12,283
  15,428
  19,081
  23,257
  27,964
  33,204
  39,430
  45,720
  52,522
  59,823
  67,609
  75,868
  84,589
  93,763
  103,382
  113,442
  123,943
  134,886
  146,277
  158,122
  170,434
  183,228
  196,520
  210,330
  224,682
  239,601
Depreciation, amort., depletion, $m
  2,923
  2,023
  2,592
  3,321
  4,234
  5,351
  6,693
  8,273
  10,104
  12,194
  14,548
  16,541
  19,424
  22,567
  25,967
  29,618
  33,514
  37,649
  42,017
  46,616
  51,440
  56,489
  61,761
  67,257
  72,981
  78,935
  85,126
  91,560
  98,246
  105,195
  112,417
Funds from operations, $m
  5,772
  6,210
  8,207
  10,731
  13,854
  17,634
  22,121
  27,355
  33,362
  40,158
  47,752
  55,971
  65,144
  75,089
  85,790
  97,227
  109,381
  122,237
  135,780
  149,997
  164,883
  180,432
  196,647
  213,534
  231,103
  249,369
  268,354
  288,080
  308,577
  329,877
  352,018
Change in working capital, $m
  878
  -151
  -199
  -255
  -319
  -391
  -469
  -553
  -640
  -731
  -823
  -916
  -1,008
  -1,100
  -1,189
  -1,277
  -1,363
  -1,446
  -1,528
  -1,608
  -1,688
  -1,766
  -1,844
  -1,923
  -2,002
  -2,083
  -2,165
  -2,251
  -2,339
  -2,431
  -2,526
Cash from operations, $m
  4,894
  6,361
  8,406
  10,986
  14,173
  18,025
  22,591
  27,908
  34,002
  40,889
  48,575
  56,887
  66,152
  76,189
  86,979
  98,504
  110,744
  123,684
  137,308
  151,606
  166,570
  182,198
  198,491
  215,456
  233,105
  251,452
  270,519
  290,331
  310,916
  332,308
  354,544
Maintenance CAPEX, $m
  0
  -967
  -1,398
  -1,966
  -2,696
  -3,608
  -4,726
  -6,068
  -7,648
  -9,479
  -11,569
  -13,923
  -16,541
  -19,424
  -22,567
  -25,967
  -29,618
  -33,514
  -37,649
  -42,017
  -46,616
  -51,440
  -56,489
  -61,761
  -67,257
  -72,981
  -78,935
  -85,126
  -91,560
  -98,246
  -105,195
New CAPEX, $m
  -7,310
  -4,309
  -5,682
  -7,291
  -9,129
  -11,179
  -13,415
  -15,804
  -18,310
  -20,899
  -23,534
  -26,185
  -28,826
  -31,436
  -33,999
  -36,508
  -38,957
  -41,349
  -43,688
  -45,983
  -48,244
  -50,486
  -52,721
  -54,965
  -57,234
  -59,543
  -61,908
  -64,343
  -66,864
  -69,484
  -72,218
Cash from investing activities, $m
  -20,048
  -5,276
  -7,080
  -9,257
  -11,825
  -14,787
  -18,141
  -21,872
  -25,958
  -30,378
  -35,103
  -40,108
  -45,367
  -50,860
  -56,566
  -62,475
  -68,575
  -74,863
  -81,337
  -88,000
  -94,860
  -101,926
  -109,210
  -116,726
  -124,491
  -132,524
  -140,843
  -149,469
  -158,424
  -167,730
  -177,413
Free cash flow, $m
  -15,154
  1,085
  1,325
  1,729
  2,348
  3,237
  4,449
  6,036
  8,043
  10,512
  13,472
  16,779
  20,785
  25,330
  30,413
  36,029
  42,169
  48,821
  55,971
  63,606
  71,710
  80,272
  89,282
  98,731
  108,614
  118,928
  129,677
  140,862
  152,492
  164,577
  177,131
Issuance/(repayment) of debt, $m
  13,973
  36,418
  48,221
  61,871
  77,473
  94,872
  113,844
  134,116
  155,387
  177,351
  199,714
  222,214
  244,625
  266,771
  288,527
  309,815
  330,602
  350,899
  370,748
  390,222
  409,414
  428,434
  447,403
  466,449
  485,703
  505,298
  525,365
  546,032
  567,424
  589,662
  612,865
Issuance/(repurchase) of shares, $m
  3,758
  7,184
  9,363
  11,807
  14,444
  17,186
  19,933
  22,577
  25,008
  27,124
  28,831
  29,594
  30,264
  30,341
  29,799
  28,625
  26,823
  24,406
  21,398
  17,827
  13,728
  9,135
  4,084
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  17,901
  43,602
  57,584
  73,678
  91,917
  112,058
  133,777
  156,693
  180,395
  204,475
  228,545
  251,808
  274,889
  297,112
  318,326
  338,440
  357,425
  375,305
  392,146
  408,049
  423,142
  437,569
  451,487
  466,449
  485,703
  505,298
  525,365
  546,032
  567,424
  589,662
  612,865
Total cash flow (excl. dividends), $m
  2,747
  44,687
  58,910
  75,408
  94,266
  115,296
  138,226
  162,729
  188,439
  214,986
  242,017
  268,586
  295,674
  322,442
  348,738
  374,468
  399,594
  424,126
  448,117
  471,655
  494,852
  517,841
  540,768
  565,179
  594,317
  624,227
  655,042
  686,894
  719,916
  754,239
  789,996
Retained Cash Flow (-), $m
  -4,166
  -11,371
  -14,978
  -19,218
  -24,064
  -29,469
  -35,362
  -41,658
  -48,266
  -55,088
  -62,034
  -69,023
  -75,984
  -82,863
  -89,621
  -96,233
  -102,690
  -108,995
  -115,160
  -121,209
  -127,170
  -133,078
  -138,970
  -144,886
  -150,867
  -156,954
  -163,187
  -169,606
  -176,251
  -183,159
  -190,366
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
 
  33,316
  43,931
  56,190
  70,201
  85,827
  102,865
  121,070
  140,173
  159,898
  179,982
  199,563
  219,690
  239,579
  259,117
  278,235
  296,903
  315,131
  332,957
  350,446
  367,681
  384,763
  401,798
  420,293
  443,449
  467,273
  491,855
  517,287
  543,665
  571,081
  599,630
Discount rate, %
 
  10.20
  10.71
  11.25
  11.81
  12.40
  13.02
  13.67
  14.35
  15.07
  15.82
  16.61
  17.45
  18.32
  19.23
  20.20
  21.21
  22.27
  23.38
  24.55
  25.77
  27.06
  28.42
  29.84
  31.33
  32.90
  34.54
  36.27
  38.08
  39.99
  41.98
PV of cash for distribution, $m
 
  30,232
  35,843
  40,814
  44,922
  47,844
  49,360
  49,379
  47,940
  45,205
  41,425
  36,795
  31,899
  26,903
  22,076
  17,624
  13,686
  10,336
  7,587
  5,411
  3,746
  2,516
  1,638
  1,036
  640
  382
  220
  122
  65
  33
  16
Current shareholders' claim on cash, %
  100
  86.7
  76.2
  67.8
  61.1
  55.6
  51.1
  47.5
  44.5
  42.0
  40.0
  38.3
  36.9
  35.7
  34.8
  34.0
  33.4
  32.9
  32.5
  32.2
  32.0
  31.9
  31.9
  31.9
  31.9
  31.9
  31.9
  31.9
  31.9
  31.9
  31.9

The Southern Company, together with its subsidiaries, engages in the generation, transmission, and distribution of electricity. The company also constructs, acquires, owns, and manages power generation assets, including renewable energy projects; sells electricity in the wholesale market; and distributes natural gas in seven states, as well as provides gas marketing services, wholesale gas services, and gas midstream operations. It owns/operates 33 hydroelectric generating stations, 29 fossil fuel generating stations, 3 nuclear generating stations, 14 combined cycle/cogeneration stations, 33 solar facilities, 7 wind facilities, 1 biomass facility, and 1 landfill gas facility. As of February 22, 2017, it had 44,000 megawatts of generating capacity and 1,500 billion cubic feet of combined natural gas consumption and throughput volume serving 9 million electric and gas utility customers. The company also provides digital wireless communications services with various communication options, including push to talk, cellular service, text messaging, wireless Internet access, and wireless data. The Southern Company was founded in 1945 and is headquartered in Atlanta, Georgia.

FINANCIAL RATIOS  of  Southern (SO)

Valuation Ratios
P/E Ratio 18.8
Price to Sales 2.4
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 9.6
Price to Free Cash Flow -19.4
Growth Rates
Sales Growth Rate 13.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -1.1%
Cap. Spend. - 3 Yr. Gr. Rate 6%
Financial Strength
Quick Ratio 0
Current Ratio 0.2
LT Debt to Equity 167.3%
Total Debt to Equity 186.2%
Interest Coverage 4
Management Effectiveness
Return On Assets 3.5%
Ret/ On Assets - 3 Yr. Avg. 3.7%
Return On Total Capital 4.1%
Ret/ On T. Cap. - 3 Yr. Avg. 4.5%
Return On Equity 10.7%
Return On Equity - 3 Yr. Avg. 10.6%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 37.7%
EBITDA Margin - 3 Yr. Avg. 36.5%
Operating Margin 23.3%
Oper. Margin - 3 Yr. Avg. 22.5%
Pre-Tax Margin 17.5%
Pre-Tax Margin - 3 Yr. Avg. 18.2%
Net Profit Margin 12.5%
Net Profit Margin - 3 Yr. Avg. 12.5%
Effective Tax Rate 27.3%
Eff/ Tax Rate - 3 Yr. Avg. 30.9%
Payout Ratio 87.3%

SO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SO stock intrinsic value calculation we used $19896 million for the last fiscal year's total revenue generated by Southern. The default revenue input number comes from 2016 income statement of Southern. 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 SO stock valuation model: a) initial revenue growth rate of 44.6% 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 10.2%, whose default value for SO is calculated based on our internal credit rating of Southern, 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 Southern.
    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 SO stock the variable cost ratio is equal to 75.5%.

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 SO 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 Southern.

Corporate tax rate of 27% is the nominal tax rate for Southern. 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 SO 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 SO are equal to 48.6%.

Life of production assets of 10 years is the average useful life of capital assets used in Southern 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 SO is equal to -1.7%. 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 - $25485 million for Southern - 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 990.811 million for Southern 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 Southern at the current share price and the inputted number of shares is $46.9 billion.

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SCG Scana 64.72 54.11  hold
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PCG PG&E 67.64 116.37  str.buy
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Stock chart of SO Financial statements of SO Annual reports of SO
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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