PG&E Corp (PCG, Financial) experienced a daily loss of -3.66% and a three-month loss of -9.46%. The company's Earnings Per Share (EPS) stands at 0.91. Considering these figures, the question arises: Is PG&E modestly overvalued? This comprehensive analysis will delve into PG&E's valuation and financial performance to provide an answer. Continue reading to gain valuable insights.
Company Introduction
PG&E Corp (PCG, Financial) is a holding company whose main subsidiary, Pacific Gas and Electric, is a regulated utility operating in Central and Northern California. Serving 5.3 million electricity customers and 4.6 million gas customers in 47 of the state's 58 counties, PG&E has a significant presence in the utilities sector. The company operated under bankruptcy court supervision between January 2019 and June 2020, and in 2004, sold its unregulated assets as part of an earlier post-bankruptcy reorganization. Currently, PG&E's stock price stands at $15.54, while the GF Value, an estimation of fair value, is $12.57. This comparison sets the stage for a deeper exploration of the company's intrinsic value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on three factors: historical multiples that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is considered overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $15.54 per share, PG&E has a market cap of $38.90 billion. Given this, PG&E (PCG, Financial) is believed to be modestly overvalued. As a result, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Hence, it is crucial to review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can provide a good initial perspective on the company's financial strength. PG&E has a cash-to-debt ratio of 0.01, which ranks worse than 95.42% of 480 companies in the Utilities - Regulated industry. Based on this, GuruFocus ranks PG&E's financial strength as 3 out of 10, suggesting a poor balance sheet.
Profitability and Growth
It is less risky to invest in profitable companies, especially those with consistent profitability over the long term. A company with high profit margins is usually a safer investment than those with low profit margins. PG&E has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $22.30 billion and Earnings Per Share (EPS) of $0.91. Its operating margin is 9.35%, which ranks worse than 56.89% of 501 companies in the Utilities - Regulated industry. Overall, the profitability of PG&E is ranked 5 out of 10, which indicates fair profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth, according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of PG&E is -32.1%, which ranks worse than 98.54% of 481 companies in the Utilities - Regulated industry. The 3-year average EBITDA growth is 0%, which ranks worse than 0% of 455 companies in the Utilities - Regulated industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, PG&E's ROIC is 7.59 while its WACC came in at 6.35.
Conclusion
Overall, PG&E (PCG, Financial) stock is believed to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 0% of 455 companies in the Utilities - Regulated industry. To learn more about PG&E stock, you can check out its 30-Year Financials here.
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