Over the last two years, shares of Evergy (NYSE:EVRG), Midwest-based utility, have been steadily appreciating and are likely to continue as the company has a generous shareholder-friendly policy, continues executing on its renewable energy strategy and maintains a strong and flexible capital structure.
Evergy is a Midwest energy company, serving customers and communities’ needs in Kansas and Missouri for more than 100 years. The company originated from a merger of Westar Energy and Kansas City Power & Light last year in May. The company generates more than 16,000 Mwh of electricity per year, of which approximately a quarter comes from renewables. As of December 2018, the company had 4832 employees, including 2,652 represented by five local unions.
Reading through the company’s latest quarterly earnings call transcript, savings from the merger in the third quarter kept on exceeding management’s initial targets, which testifies to the company's solid execution.
As of the end of the third quarter, our merger savings continue to track above our initial targets. As you recall, we've been targeting cumulative $110 million of annual merger savings for 2019, which equates to an incremental $80 million above the 2018 savings target. – Terry Bassham, President, CEO & Director
Apart from positive economies of scale, in the third quarter, the company retired over 7.5 million shares of its common stock within the scope of its current share repurchase program (~ roughly 73 percent of authorized amount).
Looking at the big picture of the company’s financials, the company has had consistently positive cash flow from operating activities and negative cash flow from investing and financing activities, communicating a narrative of a persistent investment strategy and committed distribution of capital back to shareholders. Even though the company’s profitability metrics have never got to double digits, they vastly fluctuated in the low single-digit territory.
Plugging in Evergy's financial statement figures into my DCF template, the company’s shares appear to be significantly undervalued. Under the perpetuity growth method with a terminal growth rate of 2 percent, 20 percent annual revenue growth over the next five years declining each year by 3 percent and stable operating income margin of 21 percent assumptions, the model’s estimate of intrinsic value of the stock comes in at 306.24 USD. Under the EBITDA multiple approach of a discounted cash flow model, the intrinsic per-share value of the company stands roughly at 126.15 USD if we assume that the appropriate exit EV/EBITDA multiple in five years' time is around 10x.
To sum up, Evergy is an outstanding publicly-traded utility company with a dividend yield greater than the current ten-year treasury yield. As stated during the latest quarterly earnings call, the company remains committed to paying out at least 60 to 70 percent of its net income to shareholders. With low price-to-sales (2.77x) and enterprise value-EBITDA (12.16x) valuation ratios in the context of the broader market, Evergy’s shares are a true bargain.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Please note that this article has an informative purpose, expresses its author's opinion, and does not constitute investment recommendation or advice. The author does not know individual investor's circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.