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Avista Corporation (NYSE:AVA) Shares Could Be 24% Above Their Intrinsic Value Estimate

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·4 min read
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Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Avista Corporation (NYSE:AVA) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.


See our latest analysis for Avista

The calculation

We have to calculate the value of Avista slightly differently to other stocks because it is a integrated utilities company. 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. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. 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 (2.2%). The expected dividend per share is then discounted to today's value at a cost of equity of 7.0%. Compared to the current share price of US$37.4, the company appears slightly overvalued at the time of writing. 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.


= US$1.7 / (7.0% – 2.2%)

= US$30.2


The assumptions


Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a premium to intrinsic value? For Avista, there are three pertinent factors you should assess:

  1. Risks: To that end, you should learn about the 4 warning signs we've spotted with Avista (including 1 which can't be ignored) .

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for AVA's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.



