Intrinsic value of Southern - SO

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$50.38

  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 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 49.9

 

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
  45.20
  41.18
  37.56
  34.31
  31.38
  28.74
  26.36
  24.23
  22.30
  20.57
  19.02
  17.62
  16.35
  15.22
  14.20
  13.28
  12.45
  11.70
  11.03
  10.43
  9.89
  9.40
  8.96
  8.56
  8.21
  7.89
  7.60
  7.34
  7.10
  6.89
Revenue, $m
  19,454
  28,889
  40,785
  56,105
  75,353
  98,995
  127,444
  161,043
  200,059
  244,682
  295,024
  351,128
  412,980
  480,518
  553,644
  632,242
  716,184
  805,342
  899,601
  998,862
  1,103,047
  1,212,110
  1,326,032
  1,444,828
  1,568,547
  1,697,272
  1,831,118
  1,970,234
  2,114,802
  2,265,035
  2,421,175
Variable operating expenses, $m
 
  21,529
  30,137
  41,222
  55,149
  72,256
  92,841
  117,153
  145,384
  177,673
  214,099
  254,070
  298,825
  347,694
  400,607
  457,479
  518,217
  582,731
  650,935
  722,758
  798,145
  877,060
  959,492
  1,045,451
  1,134,972
  1,228,115
  1,324,963
  1,425,625
  1,530,232
  1,638,938
  1,751,917
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
  21,529
  30,137
  41,222
  55,149
  72,256
  92,841
  117,153
  145,384
  177,673
  214,099
  254,070
  298,825
  347,694
  400,607
  457,479
  518,217
  582,731
  650,935
  722,758
  798,145
  877,060
  959,492
  1,045,451
  1,134,972
  1,228,115
  1,324,963
  1,425,625
  1,530,232
  1,638,938
  1,751,917
Operating income, $m
  4,629
  7,360
  10,649
  14,883
  20,204
  26,739
  34,603
  43,890
  54,675
  67,010
  80,925
  97,058
  114,155
  132,824
  153,037
  174,763
  197,966
  222,611
  248,666
  276,104
  304,903
  335,049
  366,540
  399,377
  433,575
  469,157
  506,155
  544,609
  584,570
  626,097
  669,257
EBITDA, $m
  7,552
  10,793
  15,238
  20,962
  28,153
  36,986
  47,615
  60,169
  74,746
  91,418
  110,226
  131,188
  154,297
  179,530
  206,852
  236,217
  267,579
  300,891
  336,108
  373,193
  412,119
  452,866
  495,430
  539,814
  586,038
  634,132
  684,139
  736,116
  790,129
  846,259
  904,595
Interest expense (income), $m
  1,100
  1,592
  2,884
  4,601
  6,812
  9,591
  13,004
  17,110
  21,960
  27,592
  34,034
  41,301
  49,399
  58,328
  68,077
  78,633
  89,979
  102,096
  114,966
  128,572
  142,901
  157,940
  173,683
  190,128
  207,276
  225,135
  243,717
  263,038
  283,120
  303,988
  325,674
Earnings before tax, $m
  3,480
  5,768
  7,765
  10,282
  13,391
  17,148
  21,599
  26,780
  32,715
  39,417
  46,891
  55,758
  64,756
  74,496
  84,960
  96,130
  107,988
  120,516
  133,701
  147,531
  162,002
  177,109
  192,856
  209,249
  226,299
  244,022
  262,438
  281,571
  301,451
  322,109
  343,583
Tax expense, $m
  951
  1,557
  2,097
  2,776
  3,616
  4,630
  5,832
  7,231
  8,833
  10,643
  12,661
  15,055
  17,484
  20,114
  22,939
  25,955
  29,157
  32,539
  36,099
  39,833
  43,741
  47,820
  52,071
  56,497
  61,101
  65,886
  70,858
  76,024
  81,392
  86,969
  92,767
Net income, $m
  2,493
  4,211
  5,668
  7,506
  9,776
  12,518
  15,767
  19,549
  23,882
  28,775
  34,231
  40,703
  47,272
  54,382
  62,021
  70,175
  78,831
  87,977
  97,601
  107,698
  118,261
  129,290
  140,785
  152,752
  165,198
  178,136
  191,579
  205,547
  220,059
  235,140
  250,815

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
  156,157
  220,462
  303,272
  407,312
  535,107
  688,884
  870,501
  1,081,402
  1,322,607
  1,594,724
  1,897,990
  2,232,325
  2,597,392
  2,992,671
  3,417,524
  3,871,263
  4,353,202
  4,862,711
  5,399,253
  5,962,418
  6,551,945
  7,167,739
  7,809,881
  8,478,633
  9,174,441
  9,897,933
  10,649,914
  11,431,364
  12,243,432
  13,087,430
Adjusted assets (=assets-cash), $m
  107,722
  156,157
  220,462
  303,272
  407,312
  535,107
  688,884
  870,501
  1,081,402
  1,322,607
  1,594,724
  1,897,990
  2,232,325
  2,597,392
  2,992,671
  3,417,524
  3,871,263
  4,353,202
  4,862,711
  5,399,253
  5,962,418
  6,551,945
  7,167,739
  7,809,881
  8,478,633
  9,174,441
  9,897,933
  10,649,914
  11,431,364
  12,243,432
  13,087,430
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
  14,040
  19,822
  27,267
  36,621
  48,111
  61,938
  78,267
  97,229
  118,916
  143,382
  170,648
  200,708
  233,532
  269,071
  307,270
  348,065
  391,396
  437,206
  485,447
  536,081
  589,085
  644,451
  702,186
  762,314
  824,874
  889,923
  957,534
  1,027,794
  1,100,807
  1,176,691
Working capital, $m
  -3,195
  -491
  -693
  -954
  -1,281
  -1,683
  -2,167
  -2,738
  -3,401
  -4,160
  -5,015
  -5,969
  -7,021
  -8,169
  -9,412
  -10,748
  -12,175
  -13,691
  -15,293
  -16,981
  -18,752
  -20,606
  -22,543
  -24,562
  -26,665
  -28,854
  -31,129
  -33,494
  -35,952
  -38,506
  -41,160
Total debt, $m
  47,457
  82,393
  131,458
  194,642
  274,024
  371,532
  488,864
  627,437
  788,355
  972,394
  1,180,019
  1,411,412
  1,666,509
  1,945,055
  2,246,653
  2,570,816
  2,917,019
  3,284,738
  3,673,493
  4,082,875
  4,512,570
  4,962,379
  5,432,230
  5,922,184
  6,432,442
  6,963,344
  7,515,368
  8,089,130
  8,685,376
  9,304,984
  9,948,954
Total liabilities, $m
  84,212
  119,148
  168,213
  231,397
  310,779
  408,287
  525,619
  664,192
  825,110
  1,009,149
  1,216,774
  1,448,167
  1,703,264
  1,981,810
  2,283,408
  2,607,571
  2,953,774
  3,321,493
  3,710,248
  4,119,630
  4,549,325
  4,999,134
  5,468,985
  5,958,939
  6,469,197
  7,000,099
  7,552,123
  8,125,885
  8,722,131
  9,341,739
  9,985,709
Total equity, $m
  25,485
  37,009
  52,250
  71,875
  96,533
  126,820
  163,266
  206,309
  256,292
  313,458
  377,950
  449,824
  529,061
  615,582
  709,263
  809,953
  917,489
  1,031,709
  1,152,462
  1,279,623
  1,413,093
  1,552,811
  1,698,754
  1,850,942
  2,009,436
  2,174,343
  2,345,810
  2,524,030
  2,709,233
  2,901,693
  3,101,721
Total liabilities and equity, $m
  109,697
  156,157
  220,463
  303,272
  407,312
  535,107
  688,885
  870,501
  1,081,402
  1,322,607
  1,594,724
  1,897,991
  2,232,325
  2,597,392
  2,992,671
  3,417,524
  3,871,263
  4,353,202
  4,862,710
  5,399,253
  5,962,418
  6,551,945
  7,167,739
  7,809,881
  8,478,633
  9,174,442
  9,897,933
  10,649,915
  11,431,364
  12,243,432
  13,087,430
Debt-to-equity ratio
  1.862
  2.230
  2.520
  2.710
  2.840
  2.930
  2.990
  3.040
  3.080
  3.100
  3.120
  3.140
  3.150
  3.160
  3.170
  3.170
  3.180
  3.180
  3.190
  3.190
  3.190
  3.200
  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
  4,211
  5,668
  7,506
  9,776
  12,518
  15,767
  19,549
  23,882
  28,775
  34,231
  40,703
  47,272
  54,382
  62,021
  70,175
  78,831
  87,977
  97,601
  107,698
  118,261
  129,290
  140,785
  152,752
  165,198
  178,136
  191,579
  205,547
  220,059
  235,140
  250,815
Depreciation, amort., depletion, $m
  2,923
  3,433
  4,589
  6,079
  7,949
  10,247
  13,013
  16,278
  20,071
  24,408
  29,301
  34,130
  40,142
  46,706
  53,814
  61,454
  69,613
  78,279
  87,441
  97,089
  107,216
  117,817
  128,890
  140,437
  152,463
  164,975
  177,985
  191,507
  205,559
  220,161
  235,338
Funds from operations, $m
  5,772
  7,644
  10,258
  13,585
  17,725
  22,765
  28,780
  35,828
  43,953
  53,183
  63,532
  74,833
  87,413
  101,088
  115,835
  131,629
  148,444
  166,256
  185,043
  204,787
  225,478
  247,107
  269,675
  293,189
  317,661
  343,111
  369,564
  397,054
  425,618
  455,301
  486,154
Change in working capital, $m
  878
  -153
  -202
  -260
  -327
  -402
  -484
  -571
  -663
  -759
  -856
  -954
  -1,051
  -1,148
  -1,243
  -1,336
  -1,427
  -1,516
  -1,602
  -1,687
  -1,771
  -1,854
  -1,937
  -2,020
  -2,103
  -2,188
  -2,275
  -2,365
  -2,458
  -2,554
  -2,654
Cash from operations, $m
  4,894
  8,071
  10,460
  13,845
  18,052
  23,167
  29,264
  36,399
  44,616
  53,941
  64,388
  75,786
  88,465
  102,237
  117,079
  132,965
  149,871
  167,771
  186,645
  206,475
  227,249
  248,961
  271,612
  295,209
  319,764
  345,299
  371,839
  399,419
  428,075
  457,855
  488,808
Maintenance CAPEX, $m
  0
  -1,935
  -2,808
  -3,964
  -5,453
  -7,324
  -9,622
  -12,388
  -15,653
  -19,446
  -23,783
  -28,676
  -34,130
  -40,142
  -46,706
  -53,814
  -61,454
  -69,613
  -78,279
  -87,441
  -97,089
  -107,216
  -117,817
  -128,890
  -140,437
  -152,463
  -164,975
  -177,985
  -191,507
  -205,559
  -220,161
New CAPEX, $m
  -7,310
  -4,367
  -5,782
  -7,445
  -9,354
  -11,490
  -13,826
  -16,329
  -18,962
  -21,687
  -24,466
  -27,267
  -30,060
  -32,823
  -35,540
  -38,199
  -40,796
  -43,331
  -45,810
  -48,240
  -50,634
  -53,004
  -55,366
  -57,735
  -60,128
  -62,560
  -65,049
  -67,611
  -70,260
  -73,013
  -75,884
Cash from investing activities, $m
  -20,048
  -6,302
  -8,590
  -11,409
  -14,807
  -18,814
  -23,448
  -28,717
  -34,615
  -41,133
  -48,249
  -55,943
  -64,190
  -72,965
  -82,246
  -92,013
  -102,250
  -112,944
  -124,089
  -135,681
  -147,723
  -160,220
  -173,183
  -186,625
  -200,565
  -215,023
  -230,024
  -245,596
  -261,767
  -278,572
  -296,045
Free cash flow, $m
  -15,154
  1,769
  1,870
  2,435
  3,245
  4,353
  5,815
  7,682
  10,000
  12,809
  16,139
  19,843
  24,275
  29,272
  34,833
  40,953
  47,622
  54,827
  62,556
  70,793
  79,525
  88,740
  98,429
  108,583
  119,199
  130,276
  141,815
  153,823
  166,309
  179,283
  192,763
Issuance/(repayment) of debt, $m
  13,973
  36,911
  49,065
  63,184
  79,382
  97,508
  117,332
  138,574
  160,917
  184,039
  207,625
  231,392
  255,097
  278,546
  301,598
  324,163
  346,203
  367,719
  388,755
  409,382
  429,695
  449,809
  469,851
  489,954
  510,258
  530,902
  552,024
  573,762
  596,246
  619,608
  643,970
Issuance/(repurchase) of shares, $m
  3,758
  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 from financing (excl. dividends), $m  
  17,901
  36,911
  49,065
  63,184
  79,382
  97,508
  117,332
  138,574
  160,917
  184,039
  207,625
  231,392
  255,097
  278,546
  301,598
  324,163
  346,203
  367,719
  388,755
  409,382
  429,695
  449,809
  469,851
  489,954
  510,258
  530,902
  552,024
  573,762
  596,246
  619,608
  643,970
Total cash flow (excl. dividends), $m
  2,747
  38,680
  50,935
  65,619
  82,627
  101,861
  123,147
  146,256
  170,918
  196,848
  223,764
  251,236
  279,373
  307,818
  336,430
  365,116
  393,824
  422,547
  451,311
  480,175
  509,220
  538,550
  568,280
  598,538
  629,457
  661,178
  693,840
  727,585
  762,555
  798,891
  836,733
Retained Cash Flow (-), $m
  -4,166
  -11,524
  -15,240
  -19,626
  -24,657
  -30,287
  -36,445
  -43,043
  -49,984
  -57,165
  -64,492
  -71,874
  -79,237
  -86,521
  -93,681
  -100,690
  -107,536
  -114,220
  -120,754
  -127,160
  -133,470
  -139,718
  -145,943
  -152,188
  -158,494
  -164,907
  -171,468
  -178,220
  -185,204
  -192,460
  -200,027
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
 
  27,156
  35,695
  45,993
  57,970
  71,573
  86,702
  103,213
  120,934
  139,682
  159,272
  179,362
  200,135
  221,297
  242,749
  264,426
  286,288
  308,327
  330,557
  353,014
  375,750
  398,832
  422,337
  446,350
  470,963
  496,271
  522,372
  549,365
  577,351
  606,431
  636,705
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
 
  24,642
  29,123
  33,408
  37,095
  39,898
  41,605
  42,096
  41,361
  39,489
  36,658
  33,071
  29,060
  24,850
  20,681
  16,749
  13,197
  10,112
  7,532
  5,450
  3,828
  2,608
  1,722
  1,100
  680
  405
  233
  129
  69
  35
  17
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

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 20
Price to Sales 2.5
Price to Book 2
Price to Tangible Book
Price to Cash Flow 10.2
Price to Free Cash Flow -20.6
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 45.2% 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 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 4.4 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 $49.9 billion.


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COMPANY NEWS

▶ Mississippi about to pull plug on Southern Co.'s Plant Kemper   [02:41PM  American City Business Journals]
▶ Inside Southern Companys Current Valuations   [Jun-20-17 03:05PM  Market Realist]
▶ Inside the Top US Utilities Dividend Profiles   [07:35AM  Market Realist]
▶ These Top Utilities Are Paying Top Dividends   [10:36AM  Market Realist]
▶ This Utility Is Growing Fastest among Peers   [07:36AM  Market Realist]
▶ Inside Three Major US Utilities Current Valuations   [Jun-14-17 09:07AM  Market Realist]
▶ The Best Utility Stock out There: NEE, DUK, or SO?   [Jun-13-17 04:59PM  Market Realist]
▶ Utilities Total Returns: Your Key Update   [Jun-12-17 10:36AM  Market Realist]
▶ Toshiba: Nuclear Nightmare Nearing an End   [Jun-11-17 11:52PM  Barrons.com]
▶ [$$] Toshiba agrees deal to cap US reactor liability   [Jun-10-17 02:02PM  Financial Times]
▶ Inside Dominion Energys Chart Indicators   [05:35PM  Market Realist]
▶ Are Analysts Still Positive about NextEra Energy?   [Jun-08-17 10:36AM  Market Realist]
▶ What Analysts Recommend for Duke Energy   [Jun-07-17 10:36AM  Market Realist]
▶ What Do Analysts Think of Southern Company?   [09:06AM  Market Realist]
▶ SO, NEE, and D: Whats Next for Overpriced US Utilities   [Jun-05-17 04:35PM  Market Realist]
▶ Report: Bechtel, Fluor will bid to take over construction of Vogtle nuclear project   [May-27-17 08:11AM  American City Business Journals]
▶ Georgia Power hosts 2017 Paperless Billing Giveaway   [May-25-17 03:04PM  PR Newswire]
▶ Mark Burns named to Georgia Power Board of Directors   [May-18-17 12:03PM  PR Newswire]
▶ Georgia Power introduces SurgeDefender   [11:37AM  PR Newswire]
▶ Which Utility Will Pay Higher Dividends in 2017?   [May-11-17 05:05PM  Market Realist]
▶ Why Duke Energys Premium Yield Is Sagging   [03:08PM  Market Realist]
▶ These Factors Drove Duke Energys 1Q17 Revenues   [May-10-17 08:05AM  Market Realist]
▶ ETFs with exposure to The Southern Co. : May 9, 2017   [May-09-17 05:03PM  Capital Cube]
▶ What Analysts Recommend for Southern Company   [09:07AM  Market Realist]
▶ Whats Southern Companys Valuation after Its 1Q17 Earnings?   [May-08-17 05:35PM  Market Realist]
▶ Whats Southern Companys Payout Ratio?   [May-03-17 06:05PM  Market Realist]
▶ Southern Co. beats 1Q profit forecasts   [07:04AM  Associated Press]
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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