MGE Energy Inc (MGEE, Financial) has recently seen a daily gain of 2.43%, but its 3-month performance shows a loss of -14.38%. With an Earnings Per Share (EPS) (EPS) of 3.16, the question arises: Is the stock modestly undervalued? This article delves into a detailed valuation analysis of MGE Energy, providing insights to help investors make informed decisions. Read on to uncover the intrinsic value of this stock.
Company Overview
MGE Energy Inc is a U.S. public utilities holding company based in Wisconsin. The company generates, purchases, and distributes electricity and natural gas, and also provides transmission services. The company generates electricity from coal and purchased power, but also from natural gas, fuel oil, and renewable sources. MGE operates through five segments, which include Regulated electric utility operations, Regulated gas utility operations, Non-regulated energy operations, Transmission investments, and All other segments. The majority of electric retail revenue is derived from commercial consumers, whereas the majority of natural gas revenue is derived from residential consumers.
As of October 03, 2023, MGE Energy (MGEE, Financial) was trading at $67.9 per share, with a market cap of $2.50 billion. However, the GF Value, an estimation of the fair value, stands at $88.83, suggesting that the stock might be modestly undervalued.
Decoding the GF Value
The GF Value is a proprietary measure of the intrinsic value of a stock. It is calculated based on the 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 on the summary page gives an overview of the fair value that the stock should be traded at.
MGE Energy shows every sign of being modestly undervalued based on GuruFocus' valuation method. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. At its current price of $67.9 per share, MGE Energy has a market cap of $2.50 billion and the stock shows every sign of being modestly undervalued.
Because MGE Energy is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength Analysis
Investing in companies with low financial strength could result in permanent capital loss. Therefore, a company's financial strength must be carefully reviewed before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. MGE Energy has a cash-to-debt ratio of 0.02, which ranks worse than 92.29% of 480 companies in the Utilities - Regulated industry. Based on this, GuruFocus ranks MGE Energy's financial strength as 4 out of 10, suggesting a poor balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. MGE Energy has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $718.50 million and Earnings Per Share (EPS) of $3.16. Its operating margin of 20.72% is better than 72.26% of 501 companies in the Utilities - Regulated industry. Overall, GuruFocus ranks MGE Energy's profitability as fair.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. MGE Energy's 3-year average revenue growth rate is worse than 55.93% of 481 companies in the Utilities - Regulated industry. MGE Energy's 3-year average EBITDA growth rate is 5.9%, which ranks better than 56.48% of 455 companies in the Utilities - Regulated industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, MGE Energy's return on invested capital is 4.99, and its cost of capital is 8.7.
Conclusion
In summary, the stock of MGE Energy shows every sign of being modestly undervalued. The company's financial condition is poor, and its profitability is fair. Its growth ranks better than 56.48% of 455 companies in the Utilities - Regulated industry. To learn more about MGE Energy stock, you can check out its 30-Year Financials here.
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