Intrinsic value of El Paso Electric Company - EE

Previous Close

$65.17

  Intrinsic Value

$7.14

stock screener

  Rating & Target

str. sell

-89%

Previous close

$65.17

 
Intrinsic value

$7.14

 
Up/down potential

-89%

 
Rating

str. sell

We calculate the intrinsic value of EE 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 0001), $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 2.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  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
  922
  943
  968
  995
  1,025
  1,058
  1,094
  1,133
  1,175
  1,220
  1,268
  1,320
  1,375
  1,433
  1,495
  1,560
  1,630
  1,703
  1,780
  1,862
  1,949
  2,040
  2,135
  2,237
  2,343
  2,455
  2,573
  2,697
  2,828
  2,965
Variable operating expenses, $m
  731
  748
  767
  789
  813
  839
  868
  898
  932
  968
  1,006
  1,047
  1,090
  1,136
  1,185
  1,237
  1,292
  1,350
  1,412
  1,477
  1,545
  1,617
  1,693
  1,774
  1,858
  1,947
  2,041
  2,139
  2,243
  2,352
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
  731
  748
  767
  789
  813
  839
  868
  898
  932
  968
  1,006
  1,047
  1,090
  1,136
  1,185
  1,237
  1,292
  1,350
  1,412
  1,477
  1,545
  1,617
  1,693
  1,774
  1,858
  1,947
  2,041
  2,139
  2,243
  2,352
Operating income, $m
  191
  195
  200
  206
  212
  219
  226
  235
  243
  253
  263
  273
  285
  297
  309
  323
  337
  353
  369
  385
  403
  422
  442
  463
  485
  508
  533
  558
  585
  614
EBITDA, $m
  293
  300
  308
  316
  326
  336
  348
  360
  374
  388
  403
  420
  437
  455
  475
  496
  518
  541
  566
  592
  619
  648
  679
  711
  745
  780
  818
  857
  899
  943
Interest expense (income), $m
  70
  86
  89
  93
  97
  101
  106
  111
  117
  124
  130
  138
  146
  154
  163
  173
  183
  193
  205
  217
  229
  243
  257
  272
  288
  304
  322
  340
  359
  380
  401
Earnings before tax, $m
  105
  106
  108
  109
  111
  113
  115
  117
  120
  122
  125
  127
  130
  133
  137
  140
  144
  148
  152
  156
  160
  165
  170
  175
  181
  187
  193
  199
  206
  213
Tax expense, $m
  28
  29
  29
  30
  30
  31
  31
  32
  32
  33
  34
  34
  35
  36
  37
  38
  39
  40
  41
  42
  43
  45
  46
  47
  49
  50
  52
  54
  56
  57
Net income, $m
  77
  78
  79
  80
  81
  83
  84
  86
  87
  89
  91
  93
  95
  97
  100
  102
  105
  108
  111
  114
  117
  121
  124
  128
  132
  136
  141
  145
  150
  155

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  3,703
  3,788
  3,886
  3,995
  4,116
  4,249
  4,394
  4,550
  4,719
  4,900
  5,094
  5,301
  5,521
  5,755
  6,003
  6,266
  6,545
  6,839
  7,150
  7,479
  7,825
  8,191
  8,576
  8,982
  9,410
  9,860
  10,334
  10,833
  11,357
  11,909
Adjusted assets (=assets-cash), $m
  3,703
  3,788
  3,886
  3,995
  4,116
  4,249
  4,394
  4,550
  4,719
  4,900
  5,094
  5,301
  5,521
  5,755
  6,003
  6,266
  6,545
  6,839
  7,150
  7,479
  7,825
  8,191
  8,576
  8,982
  9,410
  9,860
  10,334
  10,833
  11,357
  11,909
Revenue / Adjusted assets
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
  0.249
Average production assets, $m
  3,067
  3,137
  3,218
  3,309
  3,409
  3,519
  3,639
  3,768
  3,908
  4,058
  4,219
  4,390
  4,572
  4,766
  4,972
  5,189
  5,420
  5,664
  5,922
  6,194
  6,481
  6,784
  7,103
  7,439
  7,793
  8,166
  8,558
  8,971
  9,406
  9,863
Working capital, $m
  -5
  -5
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
Total debt, $m
  1,484
  1,542
  1,608
  1,683
  1,765
  1,855
  1,953
  2,060
  2,174
  2,297
  2,429
  2,569
  2,719
  2,877
  3,046
  3,225
  3,414
  3,614
  3,825
  4,048
  4,283
  4,532
  4,793
  5,069
  5,359
  5,665
  5,987
  6,325
  6,682
  7,056
Total liabilities, $m
  2,514
  2,572
  2,638
  2,713
  2,795
  2,885
  2,983
  3,090
  3,204
  3,327
  3,459
  3,599
  3,749
  3,907
  4,076
  4,255
  4,444
  4,644
  4,855
  5,078
  5,313
  5,562
  5,823
  6,099
  6,389
  6,695
  7,017
  7,355
  7,712
  8,086
Total equity, $m
  1,189
  1,216
  1,247
  1,282
  1,321
  1,364
  1,410
  1,461
  1,515
  1,573
  1,635
  1,702
  1,772
  1,847
  1,927
  2,011
  2,101
  2,195
  2,295
  2,401
  2,512
  2,629
  2,753
  2,883
  3,021
  3,165
  3,317
  3,477
  3,646
  3,823
Total liabilities and equity, $m
  3,703
  3,788
  3,885
  3,995
  4,116
  4,249
  4,393
  4,551
  4,719
  4,900
  5,094
  5,301
  5,521
  5,754
  6,003
  6,266
  6,545
  6,839
  7,150
  7,479
  7,825
  8,191
  8,576
  8,982
  9,410
  9,860
  10,334
  10,832
  11,358
  11,909
Debt-to-equity ratio
  1.250
  1.270
  1.290
  1.310
  1.340
  1.360
  1.380
  1.410
  1.440
  1.460
  1.490
  1.510
  1.530
  1.560
  1.580
  1.600
  1.620
  1.650
  1.670
  1.690
  1.710
  1.720
  1.740
  1.760
  1.770
  1.790
  1.800
  1.820
  1.830
  1.850
Adjusted equity ratio
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321
  0.321

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  77
  78
  79
  80
  81
  83
  84
  86
  87
  89
  91
  93
  95
  97
  100
  102
  105
  108
  111
  114
  117
  121
  124
  128
  132
  136
  141
  145
  150
  155
Depreciation, amort., depletion, $m
  102
  105
  107
  110
  114
  117
  121
  126
  130
  135
  141
  146
  152
  159
  166
  173
  181
  189
  197
  206
  216
  226
  237
  248
  260
  272
  285
  299
  314
  329
Funds from operations, $m
  179
  182
  186
  190
  195
  200
  205
  211
  218
  224
  232
  239
  248
  256
  266
  275
  286
  297
  308
  320
  333
  347
  361
  376
  392
  408
  426
  444
  464
  484
Change in working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
Cash from operations, $m
  179
  182
  186
  190
  195
  200
  206
  211
  218
  225
  232
  240
  248
  257
  266
  276
  286
  297
  309
  321
  334
  347
  361
  376
  392
  409
  427
  445
  464
  485
Maintenance CAPEX, $m
  -100
  -102
  -105
  -107
  -110
  -114
  -117
  -121
  -126
  -130
  -135
  -141
  -146
  -152
  -159
  -166
  -173
  -181
  -189
  -197
  -206
  -216
  -226
  -237
  -248
  -260
  -272
  -285
  -299
  -314
New CAPEX, $m
  -60
  -71
  -81
  -91
  -100
  -110
  -120
  -130
  -140
  -150
  -160
  -171
  -182
  -194
  -206
  -218
  -231
  -244
  -258
  -272
  -287
  -303
  -319
  -336
  -354
  -373
  -392
  -413
  -434
  -457
Cash from investing activities, $m
  -160
  -173
  -186
  -198
  -210
  -224
  -237
  -251
  -266
  -280
  -295
  -312
  -328
  -346
  -365
  -384
  -404
  -425
  -447
  -469
  -493
  -519
  -545
  -573
  -602
  -633
  -664
  -698
  -733
  -771
Free cash flow, $m
  19
  9
  1
  -8
  -16
  -24
  -32
  -40
  -48
  -56
  -64
  -72
  -81
  -90
  -99
  -108
  -118
  -128
  -138
  -149
  -160
  -172
  -184
  -197
  -210
  -224
  -238
  -253
  -269
  -286
Issuance/(repayment) of debt, $m
  50
  58
  66
  74
  82
  90
  98
  106
  115
  123
  132
  140
  149
  159
  169
  179
  189
  200
  211
  223
  235
  248
  262
  276
  290
  306
  322
  339
  356
  375
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  2
  5
  8
  11
  15
  18
  22
Cash from financing (excl. dividends), $m  
  50
  58
  66
  74
  82
  90
  98
  106
  115
  123
  132
  140
  149
  159
  169
  179
  189
  200
  211
  223
  235
  248
  262
  278
  295
  314
  333
  354
  374
  397
Total cash flow (excl. dividends), $m
  69
  67
  67
  67
  67
  67
  67
  67
  67
  67
  68
  68
  69
  69
  70
  71
  71
  72
  73
  74
  75
  77
  78
  81
  86
  90
  95
  100
  105
  111
Retained Cash Flow (-), $m
  -25
  -27
  -31
  -35
  -39
  -43
  -46
  -50
  -54
  -58
  -62
  -66
  -71
  -75
  -80
  -84
  -89
  -95
  -100
  -105
  -111
  -117
  -124
  -130
  -137
  -145
  -152
  -160
  -168
  -177
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  44
  40
  36
  32
  28
  24
  20
  17
  13
  9
  6
  2
  -2
  -6
  -10
  -14
  -18
  -22
  -27
  -31
  -36
  -41
  -46
  -49
  -51
  -54
  -57
  -60
  -63
  -66
Discount rate, %
  8.10
  8.51
  8.93
  9.38
  9.85
  10.34
  10.85
  11.40
  11.97
  12.57
  13.19
  13.85
  14.55
  15.27
  16.04
  16.84
  17.68
  18.57
  19.49
  20.47
  21.49
  22.57
  23.69
  24.88
  26.12
  27.43
  28.80
  30.24
  31.75
  33.34
PV of cash for distribution, $m
  41
  34
  28
  22
  17
  13
  10
  7
  5
  3
  1
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  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
  99.9
  99.8
  99.6
  99.4
  99.2
  98.9

El Paso Electric Company is a public utility company. As of December 31, 2016, the Company was engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. As of December 31, 2016, the Company owned or had ownership interests in several electrical generating facilities providing it with a generating capability of approximately 2,080 megawatts (MW). The Company's energy sources consists of nuclear fuel, natural gas, coal, purchased power and generated by Company-owned solar photovoltaic panels. As of December 31, 2016, the Company had power purchase agreements for 107 MW from solar photovoltaic generation facilities. As of December 31, 2016, the Company served approximately 411,100 residential, commercial, industrial, public authority and wholesale customers. The Company distributes electricity to retail customers principally in El Paso, Texas and Las Cruces, New Mexico.

FINANCIAL RATIOS  of  El Paso Electric Company (EE)

Valuation Ratios
P/E Ratio 27.1
Price to Sales 3
Price to Book 2.5
Price to Tangible Book
Price to Cash Flow 11.4
Price to Free Cash Flow -71.1
Growth Rates
Sales Growth Rate 4.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -17%
Cap. Spend. - 3 Yr. Gr. Rate 0%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 111.3%
Total Debt to Equity 126.6%
Interest Coverage 3
Management Effectiveness
Return On Assets 4.3%
Ret/ On Assets - 3 Yr. Avg. 4.2%
Return On Total Capital 4.1%
Ret/ On T. Cap. - 3 Yr. Avg. 4.1%
Return On Equity 9.3%
Return On Equity - 3 Yr. Avg. 9%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 41.3%
EBITDA Margin - 3 Yr. Avg. 38.8%
Operating Margin 22%
Oper. Margin - 3 Yr. Avg. 18.6%
Pre-Tax Margin 17%
Pre-Tax Margin - 3 Yr. Avg. 15.1%
Net Profit Margin 10.9%
Net Profit Margin - 3 Yr. Avg. 10.2%
Effective Tax Rate 35.8%
Eff/ Tax Rate - 3 Yr. Avg. 32.4%
Payout Ratio 51.5%

EE stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the EE stock intrinsic value calculation we used $904 million for the last fiscal year's total revenue generated by El Paso Electric Company. The default revenue input number comes from 0001 income statement of El Paso Electric Company. 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 EE 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 8.1%, whose default value for EE is calculated based on our internal credit rating of El Paso Electric Company, 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 El Paso Electric Company.
    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 EE stock the variable cost ratio is equal to 79.3%.

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 EE 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 6% for El Paso Electric Company.

Corporate tax rate of 27% is the nominal tax rate for El Paso Electric Company. 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 EE 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 EE are equal to 332.6%.

Life of production assets of 31.2 years is the average useful life of capital assets used in El Paso Electric Company 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 EE is equal to -0.5%. 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 - $1164.103 million for El Paso Electric Company - 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 40.785 million for El Paso Electric Company 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 El Paso Electric Company at the current share price and the inputted number of shares is $2.7 billion.

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