FirstEnergy’s estimated fair value based on the dividend discount model is US$43.31
With a share price of US$36.82, FirstEnergy appears to be trading close to its estimated fair value
The US$38.93 analyst price target for FE is 10% below our estimate of fair value
Does the November share price for FirstEnergy Corp. (NYSE:FE) reflect what it’s really worth? Today, we’ll estimate the intrinsic value of a stock by estimating future cash flows and then discounting them to today’s value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you’ll see from our example!
Companies can be valued in many ways, so we’ll point out that DCF isn’t perfect for every situation. For those who are interested in learning equity analysis, the Simply Wall St analysis model here may be of interest to you.
See our latest analysis for FirstEnergy
Step by step through calculations
Since FirstEnergy operates in the electric utility sector, we need to calculate intrinsic value a little differently. Instead of using free cash flow, which is difficult to estimate and often not reported by analysts in this industry, dividend per share (DPS) payments are used. This often underestimates the value of a stock, but it may still hold up well compared to competitors. We use the Gordon Growth Model, which assumes the dividend will grow at a rate that can be sustained. The dividend 10-year government bond yield is expected to grow at an annual growth rate equal to the 5-year average of 2.2%. We then discount this figure to today’s value at an equity cost of 6.2%. Relative to the current share price of US$36.8, the company currently appears to be fairly valued at a 15% discount to the stock price. However, valuations are vague instruments, rather like a telescope – move a few degrees forward and end up in a different galaxy. Be sure to keep this in mind.
Price per share = Expected Dividend per Share / (Discount Rate – Perpetual Growth Rate)
= US$1.7 / (6.2% – 2.2%)
Now the most important inputs for discounted cash flows are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try to do the calculations yourself and check your own assumptions. DCF also does not consider the potential cyclicality of an industry, or a company’s future capital requirements, so it does not give a complete picture of a company’s potential performance. Given that we are looking at FirstEnergy as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC), which accounts for debt. Is. In this calculation we used 6.2%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility compared to the overall market. We derive our beta from the industry average beta of comparable companies globally, which has a range between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for FirstEnergy
Although a company’s valuation is important, it should not be the only metric you look at when researching a company. It is not possible to achieve foolproof valuation with the DCF model. Rather it should be seen as a guide to “What assumptions need to be true for this stock to be under/overvalued?” If a company grows at a different rate, or if its cost of equity or risk-free rate changes rapidly, the output may look very different. For FirstEnergy, we’ve compiled three additional items you should assess:
risk: you should know about this 3 warning signs for FirstEnergy (2 should not be ignored!) We have disclosed before considering investing in the company.
future earnings: How does FE’s growth rate compare to its peers and the broader market? Get a deeper dive into analyst consensus numbers for the coming years by interacting with our free Analyst Growth Expectations chart.
Other high quality options: Do you like a good all-rounder? Check out our interactive list of high-quality stocks to find out what else you’re missing!
P.S. Simply Wall St updates its DCF calculations for every US stock every day, so if you want to know the intrinsic value of another stock just search here.
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This article from Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts using unbiased methodology and our articles are not intended to provide financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.