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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Entergy Corp: Cash Flow Valuation Update 0 comments
    Aug 26, 2012 6:28 PM | about stocks: ETR

    Current Price: ~ $69/share
    Yield: ~ 4.83%

    Entergy is an integrated energy company with two primary businesses. Its regulated utility distributes power to 2.8 million customers across four states through six utilities in the Southeast. Its wholesale commodity segment owns and operates six nuclear units, approximately 5,000 MW of power generation capacity, primarily in the Northeast, and is the second-largest nuclear operator in the U.S.

    Estimated WACC for the firm today is 5.71% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2002651
    2003437
    20041519
    2005-160
    20061419
    2007237
    2008845
    20092408
    20101544
    2011-199

    (click to enlarge)

    Average Annual Growth FCF: ~ -75%

    Consensus Forecast Industry 5-Year Growth: ~ 7% per year

    Consensus Forecast Company 5-Year Growth: ~ 1% per year

    Internal Growth Rate: ~ 1%

    Sustainable Growth Rate: ~ 7%

    Scenario 1
    Average FCF (2011, 2010, 2009) is $1251 million

    • Start at $1251 million FCF
    • Assume a 5-year growth rate in FCF of 1% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01251
    11264
    21276
    31289
    41302
    51315
    Terminal Value23246

    The firm's future free cash flows, discounted at a WACC of 5.71%, give a present value for the entire firm (Debt + Equity) of $23075 million. If the firm's fair value of debt is estimated at $12618 million, then the fair value of the firm's equity could be $10457 million. $10457 million / 177 million outstanding shares is approximately $59 per share and a 20% margin of safety is $47/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 3% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01251
    11289
    21327
    31367
    41408
    51450
    Terminal Value26148
    • Present Value of the entire firm (Debt + Equity): $25596 million
    • Value of Equity: $12978 million or $73/share
    • 20% margin of safety is $58/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Entergy.com

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: ETR
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