Pinnacle West Capital CorporationPNWNYSE

Overview Intelligence Charts News Fundamentals Key Metrics TTM Financials Earnings Growth Rating Analysts Institutional Peers Historical

DCF Valuation

⚠️Model Warnings

•Terminal value represents 86% of enterprise value. Valuation highly sensitive to long-term assumptions.

DCF Valuation Summary

Strong Buy

Fair Value: $170.93 per share(market-calibrated)

+70.0%

Upside to Fair Value

Current

$100.53

Pure Model

$193.71

Fair Value

$170.93

Bull Case

$259.90

Bear Case

$162.43

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: $193.71.

What's Driving This Ratingfor PNW

↓

CapEx normalizing toward maintenance

Historical CapEx is 37.08% of revenue (heavy investment phase). Model fades this to 5.00% by Year 10, freeing up ~$2.6B in annual FCF. This is the biggest driver of long-term cash flow improvement.

✓

Premium margins already priced in

EBIT margin of 21.63% 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 4.39% revenue growth, fading to 2.00% by Year 10. Revenue reaches $8.0B (vs $5.3B today).

↔

Perpetuity and exit methods disagree

Perpetuity growth gives $243.69/share (29.1x terminal FCF) while exit multiple gives $143.73/share (20.5x 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 77.99% indicates efficient cash generation. FCF reaches $2.4B by Year 10 (29.48% FCF margin).

Weighted Average Cost of Capital (WACC)

Cost of Equity (CAPM)

Risk-Free Rate (Rf)4.50%

Beta (β)0.55

Market Risk Premium4.50%

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

Cost of Equity (Re)6.95%

Cost of Debt

Pre-tax Cost of Debt1.81%

Tax Rate14.45%

After-tax Cost of Debt1.55%

Equity Weight (E/V)40.27%

Debt Weight (D/V)59.73%

WACC Calculation

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

WACC = (40.27% × 6.95%) + (59.73% × 1.55%)

= 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	$5.6B	$6.2B	$6.8B	$7.4B	$8.0B
EBIT	$1.2B	$1.3B	$1.5B	$1.6B	$1.7B
Tax	$174M	$194M	$213M	$232M	$251M
NOPAT	$1.0B	$1.1B	$1.3B	$1.4B	$1.5B
+ Depreciation	$901M	$1.0B	$1.1B	$1.2B	$1.3B
- Capex	$2.1B	$1.9B	$1.6B	$1.2B	$402M
- Δ NWC	$23M	$25M	$34M	$28M	$16M
Free Cash Flow	-$157M	$268M	$775M	$1.4B	$2.4B
Discount Factor	0.948	0.852	0.765	0.687	0.585
Present Value	-$149M	$228M	$593M	$950M	$1.4B

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

Terminal Value Calculation

Perpetuity Growth Method

Year 10 FCF$2.4B

Terminal Growth Rate2.00%

WACC5.50%

TV = FCF₁₀ × (1+g) / (WACC-g)

Terminal Value$69.0B

PV of Terminal Value$40.4B

Exit Multiple Method

Year 10 EBITDA$3.0B

Exit Multiple (EV/EBITDA)16.0x

TV = EBITDA₁₀ × Exit Multiple

Terminal Value$48.6B

PV of Terminal Value$28.4B

Valuation Summary

Perpetuity Growth Method

PV of Projected FCFs$6.6B

PV of Terminal Value$40.4B

Enterprise Value$47.0B

(-) Net Debt$17.8B

Equity Value$29.2B

Shares Outstanding120M

Price per Share$243.69

Exit Multiple Method

PV of Projected FCFs$6.6B

PV of Terminal Value$28.4B

Enterprise Value$35.0B

(-) Net Debt$17.8B

Equity Value$17.2B

Shares Outstanding120M

Price per Share$143.73

Pure Model Fair Value

$193.71

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%	$342.12	$414.72	$390.54	$367.51	$345.58
4.50%	$224.82	$256.53	$300.92	$367.51	$345.58
5.50%	$154.91	$171.88	$193.71	$222.82	$263.56
6.50%	$107.15	$117.36	$129.83	$145.43	$165.48
7.50%	$71.77	$78.39	$86.21	$95.59	$107.06

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

$162.43

61.6% vs current

• -25% vs analyst consensus
• Terminal growth: 2.0%
• Beta: 0.68

Base Case

$193.71

92.7% vs current

• Analyst consensus
• Terminal growth: 2.0%
• Beta: 0.55

Bull Case

$259.90

158.5% vs current

• +25% vs analyst consensus
• Terminal growth: 2.5%
• Beta: 0.46

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

Growth Assumptions (Select Years)

Year 1 Revenue Growth4.39%

Year 3 Revenue Growth4.28%

Year 5 Revenue Growth5.29%

Year 7 Revenue Growth3.97%

Year 10 Revenue Growth2.00%

Terminal Growth Rate2.00%

Margin & Efficiency

Current EBIT Margin21.63%

Tax Rate14.45%

Historical Capex / Rev37.08%

Terminal Capex / Rev5.00%

NWC / Revenue9.85%

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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