Calculating The Intrinsic Value Of WEC Energy Group, Inc. (NYSE:WEC)

WEC Energy Group Inc +0.88% Pre
 WEC Energy Group Inc WEC 95.85 95.85 +0.88% 0.00% Pre

### Key Insights

• WEC Energy Group's estimated fair value is US\$99.82 based on Dividend Discount Model
• WEC Energy Group's US\$82.12 share price indicates it is trading at similar levels as its fair value estimate
• Analyst price target for WEC is US\$87.10 which is 13% below our fair value estimate

In this article we are going to estimate the intrinsic value of WEC Energy Group, Inc. (NYSE:WEC) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for WEC Energy Group

## The Method

As WEC Energy Group operates in the integrated utilities sector, we need to calculate the intrinsic value slightly differently. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (2.3%). The expected dividend per share is then discounted to today's value at a cost of equity of 6.0%. Relative to the current share price of US\$82.1, the company appears about fair value at a 18% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= US\$3.7 / (6.0% – 2.3%)

= US\$99.8

## The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at WEC Energy Group 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. In this calculation we've used 6.0%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

### SWOT Analysis for WEC Energy Group

Strength
• Debt is well covered by earnings.
Weakness
• Earnings declined over the past year.
• Dividend is low compared to the top 25% of dividend payers in the Integrated Utilities market.
Opportunity
• Annual earnings are forecast to grow for the next 3 years.
• Good value based on P/E ratio and estimated fair value.
Threat
• Debt is not well covered by operating cash flow.
• Dividends are not covered by cash flow.
• Annual earnings are forecast to grow slower than the American market.