DCF models are not the be-all and end-all of investment valuation. Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. 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. Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 6.2%, which is based on a levered beta of 0.800. Given that we are looking at Xcel Energy 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. 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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. Relative to the current share price of US$59.0, the company appears slightly overvalued at the time of writing. The expected dividend per share is then discounted to today's value at a cost of equity of 6.2%. In this case we used the 5-year average of the 10-year government bond yield (2.0%). For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. 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. We have to calculate the value of Xcel Energy slightly differently to other stocks because it is a electric utilities company. View our latest analysis for Xcel Energy What's the estimated valuation? If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis 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.Ĭompanies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. We will use the Discounted Cash Flow (DCF) model on this occasion. ( NASDAQ:XEL) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value.
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