TransAlta Corp (TAC, Financial) experienced a daily loss of 4.31% and a 3-month loss of 4.13%, with an Earnings Per Share (EPS) of 0.7. Despite these figures, the question remains: Is the stock modestly undervalued? This article delves into a comprehensive valuation analysis of TransAlta (TAC), providing valuable insights for investors.
Company Overview
TransAlta is a leading independent power producer based in Alberta, Canada. The company operates a diverse fleet of electrical power generation assets across Canada, the United States, and Australia. These assets include hydro, wind, solar, battery storage, gas, and energy transition facilities. The majority of TransAlta's revenues stem from the sale of generation capacity, electricity, thermal energy, environmental attributes, and byproducts of power generation.
Currently, TransAlta's stock price stands at $8.87, while its GF Value, an estimate of fair value, is $12.2. This discrepancy suggests that the stock may be modestly undervalued. The company's market cap is $2.30 billion, with sales reaching $2.60 billion.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides an overview of the stock's ideal fair trading value.
TransAlta's current GF Value suggests that the stock is modestly undervalued. If a stock price is significantly above the GF Value Line, it indicates overvaluation and potentially poor future returns. Conversely, if it's significantly below the GF Value Line, higher future returns are likely.
Given TransAlta's relative undervaluation, the long-term return of its stock is likely to exceed its business growth.
Assessing Financial Strength
Investing in companies with weak financial strength can lead to permanent capital loss. Therefore, it's crucial to review a company's financial strength before purchasing its shares. TransAlta's cash-to-debt ratio is 0.27, ranking better than 52.88% of companies in the Utilities - Independent Power Producers industry. However, GuruFocus ranks TransAlta's financial strength as 4 out of 10, indicating a poor balance sheet.
Profitability and Growth
Investing in profitable companies generally carries less risk. TransAlta has been profitable for 5 years over the past decade. With revenues of $2.60 billion and an Earnings Per Share (EPS) of $0.7 in the past 12 months, the company's operating margin of 23.65% is better than 65.12% of companies in the same industry.
Growth is a critical factor in a company's valuation. TransAlta's average annual revenue growth is 9.8%, ranking worse than 51.24% of companies in the Utilities - Independent Power Producers industry. The 3-year average EBITDA growth is 4.4%, ranking worse than 55.72% of companies in the same industry.
ROIC vs WACC
The comparison between a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) is a key profitability indicator. When the ROIC is higher than the WACC, it suggests the company is creating value for shareholders. TransAlta's ROIC for the past 12 months is 7.57, and its WACC is 6.13.
Conclusion
In conclusion, TransAlta (TAC, Financial) appears to be modestly undervalued. Although the company's financial condition is poor, its profitability is fair. However, its growth ranks worse than 55.72% of companies in the Utilities - Independent Power Producers industry. For more information about TransAlta's stock, check out its 30-Year Financials here.
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