Atmos Energy Corp (ATO)

Total return at 5 years: 5.8%/year = 2.9% appreciation + 2.9% dividend. The target price ($187) is ex-dividend; the $25 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $268 · Multiples $172) exceeds the market price ($162).

Today — fairly valued: at $162 trades ~5.7% below its value discounted to today (~$172); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($187) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$110.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($162) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-1.3%/year) than we project (10.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.2 bn of owner earnings in year 5 (vs ~$2.1 bn of our base case). It recalculates if the DCF assumptions are edited.

A regulated utility is valued on P/E over adjusted earnings (equity-level): the value sits in the regulated base (rate base), which grows with capex at an allowed ROE. GAAP can be depressed by the mark-to-market of hedges → the adjusted figure is used. It returns capital via dividend (a dividend aristocrat); it may issue some equity to fund capex. Total return adds the dividend collected along the way. In edit mode, the metric, shares, dividend, and exit multiple can be adjusted.

Year 0 is the TTM to 30-Jun-2026 (XBRL, with facts filed through the 8-K of 5-Aug-2026, with no need for a rebase). Year 1 anchors to the reaffirmed guidance in the third-quarter fiscal 2026 earnings 8-K: diluted EPS US$8.40-US$8.50 (midpoint US$8.45, +13.3% versus the US$7.46 of FY2025) and capex of approximately US$4,200 million for the full fiscal year. Since the TTM already incorporates nine of the twelve months of fiscal 2026, the guided rate of +13.3% is applied as the TTM→year 1 step (the same criterion as aggregate net income, given that ATO does not report a separate EPS by segment). From there the path decelerates geometrically toward ~7% net income growth (~4% in EPS, after the dilution of the ATM program) by year 5, within the method's utility band (a 3-6% landing) but sustained at the high end over the full horizon because the model's five years fall entirely within the 2026-2030 capital plan (~US$26,000 million, over 80% directed to safety and reliability) that the company has already declared. Diluted shares grow ~3.5-5.5%/year reflecting continuous issuance under the ATM program (US$1,700 million of capacity, US$828.5 million available at Nov-2025) that funds the equity portion of the plan; that is why aggregate net income grows faster than EPS. The dividend follows the declared policy (US$4.00 annual indicated for FY2026, +14.9% versus FY2025) and decelerates alongside earnings. The base exit multiple is 17× P/E (utility band 15-18×, a mid-to-high position for sustained double-digit earnings growth and consistent regulatory execution across the 8 jurisdictions).

Today's multiple compresses on its own going forward as the metric per share grows. The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—. Total return adds the dividend collected; the required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $187 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $162, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $187 in 5 years plus $25 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $172. Against the current market price ($162), the margin of safety is 5.7% (trades below the maximum → there is margin) and the total return at that price would be 5.8% annually.

• Current P/E vs exit band. The entry P/E at market price (~20.5× on TTM EPS) is above the base exit multiple of 17×, reflecting expected multiple compression as growth decelerates.
• Estimated total return. 5-year IRR (appreciation plus growing dividend) of +6% against the method's hurdle bar.
• Margin of safety. The margin of safety at today's price is It trades close to intrinsic value, far from the required margin of safety..
• Dividend yield. ~2.35% at today's price ($4.00/$169.96), growing at a double-digit rate in the most recent year (+14.9%) and decelerating toward ~6-8% over the model horizon.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (89%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital (earned ROE). ~9.3% (approximated from the filing), below the method's 10% bar — typical of a regulated utility where the return is set by the regulatory commission.
• Incremental ROIC. ~11.1% (Δnet income / Δequity FY25 vs FY24), above the 10% bar — new capex is being passed through to rates at a reasonable return.
• Regulatory predictability. Gas cost pass-through with no markup, weather normalization in 7 states, and bad-debt recovery in 6 states reduce the volatility of operating results.
• Cash generation vs capex. Reported FCF (OCF less total capex) is negative (~$-2,020M TTM) because growth capex significantly exceeds OCF — typical and expected for a utility in a rate-base expansion phase, not a sign of weakness.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Atmos Energy is a pure natural gas distributor: the growth driver is not volume × market price but regulated capex × rate-recovery pace. Distribution volume grows modestly and steadily (+1.8% in FY2025); the real engine is the pace at which the 2026-2030 plan's capex converts into implemented rate-making outcomes, which grew from $333.6M (FY2025) to $355.0M annualized (Q3 FY2026).

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Net income. Grew 14.4% (FY23), 17.7% (FY24), and 14.9% (FY25) annually; FY2026 guidance +13.3% in EPS.
• Regulated capital base. The ~$26,000M 2026-2030 plan (>80% in safety and reliability) sustains the growth path across the entire modeled horizon.
• Share dilution. EPS grows slower than aggregate net income due to continuous issuance under the ATM program funding the equity portion of capex.
• Implemented rate-making outcomes. Accelerated from $333.6M (FY2025) to $355.0M annualized (Q3 FY2026), a leading indicator that guided growth is materializing.

• De facto regulated monopoly. 1,010 municipal franchises, historical successful renewal rate of 100%; no physical distribution competitor.
• Compressed regulatory lag. Annual formula and infrastructure mechanisms capture ~95% of capex in rates within 6 months across the 8 jurisdictions.
• Geographic concentration in Texas. ~75% of consolidated operations depend on a single dominant state regulator (though also on the RRC for the pipeline).
• Gas cost pass-through with no markup. The cost of gas is passed through dollar for dollar; it protects operating margin but also means the business neither gains nor loses on the commodity price.
• Stable volume demand. Distribution volume grows modestly (+1.8% in FY2025); real growth comes from capex, not from consumption.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Regulated return (earned vs allowed ROE)Earns 9.3% vs allowed 9.3%
• !Value creation (allowed ROE − 10% bar)-0.7pp
• ✓Leverage (net debt / EBITDA)3.5x · S&P A- / Moody's A2 (stable outlook)
• ✓Predictability (% regulated + rate-base growth)100% regulated · rate base +$26 bn/year

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Credit rating. S&P A- / Moody's A2, stable outlook on both; solid investment-grade rating for a utility of this size.
• Capital structure. 60.3% equity / 39.7% long-term debt at the close of FY2025; short-term debt at zero, with no dependence on short-term commercial paper to operate.
• Liquidity. $4,900M in total available liquidity at the close of FY2025 (cash + forward sales + undrawn credit lines), sufficient cushion relative to the pace of capex.
• Net debt / EBITDA. ~3.55× (TTM), a moderate level for a utility with an aggressive capital plan underway.
• Dependence on external financing. Operating FCF does not cover capex; the business depends on continuous debt and equity issuance to sustain the growth plan — a risk if market conditions deteriorate.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. 86% of combined cash use goes to regulated reinvestment, 14% to dividends; no M&A or buyback, consistent with a utility in a rate-base expansion phase.
• Alignment / ownership. No controlling shareholder identified; dispersed institutional ownership (~39.8% across the top 5 holders). No evidence of concentrated skin in the game in the available extraction.
• Financial discipline. Investment-grade rating sustained (A-/A2) with 60.3% equity capitalization, prioritizing balance-sheet strength over aggressive leverage to fund growth.
• Results communication. Guidance reaffirmed (not revised up or down) in the Aug 5, 2026 8-K, with consistent delivery within the guided range over recent fiscal years.

• It is a double-digit growth utility (14-18% annual net income growth) that the market tends to value with the low multiple of a typical 3-6% growth utility, without fully recognizing the duration of the already-disclosed 2026-2030 capital plan.
• No notable media coverage: it is a pure gas distributor with no exposure to trendy narratives (AI, disruptive energy transition), which may keep it off the radar of thematic flows.
• The utility sector as a whole trades with sensitivity to interest rates; a utility with high external financing needs (debt + ATM) can suffer an additional discount in high-rate environments, even if its regulatory execution is solid.

At a market price of $162 the verdict is Fairly valued: there is no evident motivated-seller-type discount source (no restructuring, impairment, or recent consensus miss) — the story is more one of unrecognized growth (relative missing buyers) than panic. The current price level already reflects much of the guided growth, so the margin of safety today is It trades close to intrinsic value, far from the required margin of safety..

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at ~0%/year (+1% total): the margin of safety protects the downside. The bull (+8%/year, +46% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Regulatory lag. If state commissions modify the annual formula/infrastructure mechanisms, the company would absorb the cost of capital without the corresponding pass-through to rates.
• Concentration in Texas. ~75% of consolidated operations depend on the regulatory and economic evolution of a single state.
• Interest-rate risk. The $26,000M plan is financed in part with debt; a sustained rate increase raises financing costs and compresses the net return on new capex.
• Dilution from the ATM program. Continuous share issuance to fund the equity portion of capex causes EPS to grow slower than aggregate net income.
• Pipeline integrity (PHMSA). More demanding safety standards may require additional capex or accelerated maintenance with a short-term cost impact, though generally recoverable through rates.
• Cybersecurity. Dependence on dispatch, meter-reading, and billing systems; a cyberattack could disrupt gas delivery or expose customer data.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROE 9% does not clear the 10% bar (regulated return by design).

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 10% at a PEG of 2.0 → reasonable for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Not applicable — the Magic Formula excludes financials and regulated businesses (EBIT/EV does not capture the operating leverage).

• Howard Marks Perception vs reality + cycle

  The price discounts -1% vs our 10%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -3%/yr, bull-scenario ceiling +5%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, efficient scale, intangibles, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -1%, within what we project (10%) — the story squares with the numbers.