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PNM Resources, a prominent player in the electric utilities sector, has its shares currently trading at approximately $43.77, closely mirroring its fair value of $39.92 as calculated by the Dividend Discount Model (DDM). This model is frequently employed for utilities entities, which often do not disclose their free cash flow.
The DDM substitutes dividends per share for free cash flow and projects future dividends using the ‘Gordon Growth Model’. This model presumes a constant growth rate that reflects the five-year average of the 10-year government bond yield, which currently stands at 2.2%. The projected value is then discounted to its present worth using a cost of equity of 6.2%, resulting in the estimated value of the company.
Despite the close alignment of PNM Resources’ current trading price and its DDM valuation, analysts have set a target price at $50.77. This suggests a potential rise of 27% from the DDM estimate, indicating a positive outlook for the company’s future performance in the market.
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