Pinnacle West Capital (PNW)

Total return at 5 years: 2.7%/year = -1.3% appreciation + 4.1% dividend. The target price ($91) is ex-dividend; the $19 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($98) and the other below.

Today — expensive, no margin of safety: at $98 trades ~8.2% above its value discounted to today (~$90); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($91) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$58.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($98) 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 (-3.4%/year) than we project (4.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$0.5 bn of owner earnings in year 5 (vs ~$0.8 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 as of Jun 30, 2026 (net income attributable to common US$640.1 million, NetIncomeLossAvailableToCommonStockholdersBasic tag). Year 1 anchors to the guidance in the Aug 4, 2026 8-K: 2026 weather-normalized EPS of US$4.55-4.75 (midpoint US$4.65). With the first half of 2026 already reported (EPS US$1.70) and an implied second half of ~US$2.95, year-1 EPS (TTM+1yr window) falls to ~US$4.71-4.75, a compression of ~8% versus actual TTM from higher interest charges, higher depreciation and the dilution from the continuous equity issuance (ATM) financing the regulated capex plan (US$2.6/2.65/2.7 billion for 2026-2028, disclosed in the 10-K). It is a declared trough, not a path error: aggregate earnings keep growing supported by rate-base growth (US$12.5 billion at year-end 2025, original cost) financed with new debt and equity; what falls is EPS from the dilution effect plus the regulatory lag until the next rate case. From year 2, aggregate earnings growth recovers toward 5-6% annually, decelerating to ~3-4% by year 5 as the pace of dilution moderates, within the method's regulated-utility band (3-6% terminal growth). The earned ROE (~9.3-9.8%) converges toward the 9.55% authorized by the Arizona Corporation Commission in the 2022 rate case (in effect since Feb 2024), just below the 10% quality bar - typical of a well-run regulated utility subject to lag. The dividend follows historical policy (~1.7-2% annually, payout ~70% of TTM EPS) and is not modeled with a share buyback: the share count grows (dilution via ATM), the same path across all three scenarios as the revealed financing behavior for the capex plan.

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 $91 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $98, 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 $91 in 5 years plus $19 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 $90. Against the current market price ($98), the margin of safety is -8.2% (trades above the maximum → a premium is paid) and the total return at that price would be 2.7% annually.

• Entry multiple. Trades near the high end of its 52-week range, with an implied TTM P/E of ~19x on earnings guided to compress in the near term.
• Projected total return. The base case yields a 5-year total return of +3%, No margin of safety: at this price capital is preserved, but it is not bought below its value.
• Dividend. Current dividend yield of 3.7%, with historical growth of ~1.7-2% annually and an already elevated payout (~70% of TTM EPS).
• Sensitivity to exit multiple. The base case already sits in the lower half of the regulated-utilities band (15-18x); a re-rating toward the top of the band depends on the earned ROE converging to or exceeding the authorized level.

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

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (100%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. Earned ROE ~9.3-9.8%, just below the 10% quality bar, converging to the authorized 9.55%.
• Cash flow predictability. The regulated cost-recovery model makes cash flow predictable as long as the ACC approves rates within a reasonable time.
• Free cash flow generation. Structurally negative FCF (TTM -US$0.88 billion) from intensive capex, financed with debt and equity - normal in an investment phase, not a sign of deterioration.
• Earnings-to-cash conversion. Operating cash flow (TTM US$1.77 billion) comfortably exceeds net income (US$0.64 billion), reflecting the strong non-cash depreciation add-back typical of a utility.

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

The four drivers combine volume (sales growth), investment (the capex plan expanding the rate base) and the lagged result of that investment (earnings and dividend). The deceleration in revenue growth from FY23-24 to FY25-TTM does not reflect a weak business but tougher comparisons after two exceptional years; the capex sustained at US$2.6-2.7 billion annually is the driver that sustains rate-base growth and, with a utility's usual regulatory lag, future earnings and dividend growth.

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).

• Sales volume. Weather-adjusted sales grew 5.6% in Q2 2026, with residential customer growth of 2.1%.
• Data centers. Projected contribution of 3-5 percentage points to 2026 sales growth, a verifiable incremental driver in company guidance.
• Earnings-per-share growth. Compressed in year 1 by regulatory lag and dilution; recovers only from year 2 in the base case.
• Reinvestment runway. The capex plan of US$2.6-2.7 billion annually (2026-2028) is explicit and sustainably expands the rate base.

• Exclusive regulated franchise. No retail competition within APS's service territory, a monopoly granted and overseen by the ACC.
• Customer diversification. No individual customer exceeded 1.9% of electric revenue in 2025.
• Single-state exposure. The entire operation depends on Arizona's economy and regulatory regime, with no geographic diversification.
• Structural demand growth. Population, advanced industry and data centers drive sales growth above the average of the U.S. electric utility sector.
• Single-segment dependence. 100% of the business is regulated electricity; there is no diversification into higher-margin unregulated businesses.

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 9.8% vs allowed 9.6%
• !Value creation (allowed ROE − 10% bar)-0.5pp
• ✓Leverage (net debt / EBITDA)4.9x · Not disclosed in the filings analyzed (10-K, 8-K, DEF 14A): a data point from credit rating agencies that would require an additional Layer C source not incorporated into this record.
• ✓Predictability (% regulated + rate-base growth)100% regulated · rate base +$2.7 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.

• Leverage. Net debt to EBITDA of ~4.9x, a typical but elevated level for the intensive-capex regulated utility sector.
• Holding structure. Pinnacle West's debt is structurally subordinated to APS's, which has no legal obligation to distribute cash to the parent.
• Regulatory equity ratio. APS's common equity ratio (52%) comfortably exceeds the 40% minimum required by the ACC financing agreement.
• Liquidity. Minimal cash (US$9.1 million), consistent with a utility that manages liquidity via committed credit lines and continuous access to the debt and equity markets.
• Credit rating. Not available in the filings analyzed; would require an additional Layer C source.

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

• CEO track record. Ted Geisler took over in 2025 after serving as CFO and President of APS; he knows the business and the regulatory framework from the inside.
• Skin in the game. Director and executive share ownership is low (less than 1%), with no controlling shareholder.
• Capital allocation. Disciplined reinvestment in the regulated business, with no acquisitions outside the core and no buybacks competing with necessary capex.
• Financing growth. The capex plan is financed with debt and continuous equity dilution, a real cost to the current shareholder that earnings per share absorb with a lag.

• 2026 EPS guidance below actual FY2025 EPS and TTM: the guided compression (~8%) is a genuine motivated-seller signal - the market penalizes the guidance headline without necessarily distinguishing that aggregate earnings keep growing supported by the rate base
• Regulatory lag: the capex already committed for 2026-2028 is not yet fully recognized in current rates, which depresses the earned ROE below the authorized level until the next rate case
• Share dilution from the continuous equity issuance (ATM) financing the capex plan, a real cost the headline EPS reflects but not a sign of deterioration in the underlying business

PNW is not classically cheap: it trades near the high end of its 52-week range (US$85.87-US$109.37, down only 11% from its high) despite the 2026 guided EPS compression, which suggests the market is already looking past the near-term trough toward the structural rate-base growth driven by Arizona's population and data centers. No margin of safety: at this price capital is preserved, but it is not bought below its value.

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 -3%/year (-12% total): the margin of safety protects the downside. The bull (+7%/year, +42% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Regulatory lag. Capex already committed is not fully recognized in current rates until the next rate case.
• Data center demand uncertainty. Risk of stranded costs if projected demand fails to materialize, or of capital constraints if it accelerates faster than expected.
• Wildfires and drought. Growing risk from extreme temperatures and prolonged drought, with potential liability regardless of the company's degree of fault.
• Nuclear risk (Palo Verde). Extensive NRC oversight, with the possibility of significant capital requirements and liability of up to US$144.9 million per incident under the federal regime.
• Structural subordination of the holding company. Pinnacle West depends on distributions from APS, which is not legally required to make them.
• Rising cost of capital. Higher interest rates raise the cost of financing the capex plan and a credit rating downgrade would limit access to the commercial paper market.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROE barely matches the 10% bar (the market's opportunity cost), no excess return.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 4% at a PEG of 4.8 → expensive 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 -3% vs our 4%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -7%/yr, bull-scenario ceiling +4%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

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

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -3%, within what we project (4%) — the story squares with the numbers.