CMS Energy CorporationCMSNYSE

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DCF Valuation

DCF Valuation Summary

Strong Buy

Fair Value: $178.38 per share(market-calibrated)

+128.5%

Upside to Fair Value

Current

$78.08

Pure Model

$194.28

Fair Value

$178.38

Bull Case

$236.00

Bear Case

$175.85

Market Reality Check

Model Terminal Growth

2.00%

Market-Implied Growth

0.50%

Calibrated Growth

1.48%

Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $194.28.

What's Driving This Ratingfor CMS

↓

CapEx normalizing toward maintenance

Historical CapEx is 33.99% of revenue (heavy investment phase). Model fades this to 5.00% by Year 10, freeing up ~$3.4B in annual FCF. This is the biggest driver of long-term cash flow improvement.

✓

Premium margins already priced in

EBIT margin of 32.65% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.

→

Moderate revenue growth

Analyst consensus projects 1.17% revenue growth, fading to 2.00% by Year 10. Revenue reaches $11.8B (vs $8.5B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $226.13/share (29.1x terminal FCF) while exit multiple gives $162.43/share (21.3x terminal FCF). The base case averages both methods.

🎯

Market pricing in lower growth than model

The market implies only 0.50% perpetual growth — 150bps below the model's 2.00%. This suggests the market sees headwinds or risks not in the model.

✓

Strong cash flow conversion

Year 10 FCF/EBITDA conversion of 75.23% indicates efficient cash generation. FCF reaches $4.2B by Year 10 (35.08% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.48

Market Risk Premium4.50%

*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)

Cost of Equity (Re)6.66%

Cost of Debt

Pre-tax Cost of Debt3.34%

Tax Rate19.71%

After-tax Cost of Debt2.68%

Equity Weight (E/V)55.34%

Debt Weight (D/V)44.66%

WACC Calculation

WACC = (E/V × Re) + (D/V × Rd × (1-Tc))

WACC = (55.34% × 6.66%) + (44.66% × 2.68%)

= 5.50%

10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)

Year	Year 1	Year 3	Year 5	Year 7	Year 10
Revenue	$8.6B	$9.4B	$10.3B	$11.0B	$11.8B
EBIT	$2.8B	$3.1B	$3.4B	$3.6B	$3.9B
Tax	$556M	$603M	$665M	$710M	$762M
NOPAT	$2.3B	$2.5B	$2.7B	$2.9B	$3.1B
+ Depreciation	$1.2B	$1.3B	$1.4B	$1.5B	$1.7B
- Capex	$2.9B	$2.6B	$2.2B	$1.6B	$592M
- Δ NWC	$6M	$19M	$22M	$19M	$13M
Free Cash Flow	$530M	$1.2B	$1.9B	$2.8B	$4.2B
Discount Factor	0.948	0.852	0.765	0.687	0.585
Present Value	$502M	$992M	$1.5B	$1.9B	$2.4B

FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$4.2B

Terminal Growth Rate2.00%

WACC5.50%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$121.0B

PV of Terminal Value$70.9B

Exit Multiple Method

Year 10 EBITDA$5.5B

Exit Multiple (EV/EBITDA)16.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$88.3B

PV of Terminal Value$51.7B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$15.4B

PV of Terminal Value$70.9B

Enterprise Value$86.3B

(-) Net Debt$18.3B

Equity Value$68.0B

Shares Outstanding301M

Price per Share$226.13

Exit Multiple Method

PV of Projected FCFs$15.4B

PV of Terminal Value$51.7B

Enterprise Value$67.1B

(-) Net Debt$18.3B

Equity Value$48.8B

Shares Outstanding301M

Price per Share$162.43

Pure Model Fair Value

$194.28

Average of perpetuity growth and exit multiple methods (before market calibration)

Sensitivity AnalysisPrice per Share

WACC ↓ / Growth →	1.00%	1.50%	2.00%	2.50%	3.00%
3.50%	$299.47	$350.16	$332.86	$316.38	$300.67
4.50%	$216.76	$238.90	$269.89	$316.38	$300.67
5.50%	$167.19	$179.04	$194.28	$214.60	$243.04
6.50%	$133.14	$140.26	$148.97	$159.86	$173.86
7.50%	$107.78	$112.40	$117.86	$124.41	$132.42

How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.

Scenario Analysis

Bear Case

$175.85

125.2% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 0.60

Base Case

$194.28

148.8% vs current

• Analyst consensus
• Terminal growth: 2.0%
• Beta: 0.48

Bull Case

$236.00

202.2% vs current

• +25% vs analyst consensus
• Terminal growth: 2.5%
• Beta: 0.41

Key Assumptions & Drivers✓ Using Analyst Consensus Estimates• Utilities Sector

Growth Assumptions (Select Years)

Year 1 Revenue Growth1.17%

Year 3 Revenue Growth3.77%

Year 5 Revenue Growth3.94%

Year 7 Revenue Growth3.16%

Year 10 Revenue Growth2.00%

Terminal Growth Rate2.00%

Margin & Efficiency

Current EBIT Margin32.65%

Tax Rate19.71%

Historical Capex / Rev33.99%

Terminal Capex / Rev5.00%

NWC / Revenue5.71%

Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.

Institutional-Grade Methodology

Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta

Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 16x EV/EBITDA (Utilities sector)

This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.

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