Rating Update: Stock Rating C-Neutral (10/17/19)-CMS Energy Corp (CMS).

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BUSINESS

CMS Energy Corporation operates as an energy company primarily in Michigan. It operates through three segments: Electric Utility, Gas Utility, and Enterprises. The Electric Utility segment engages in the generation, purchase, transmission, distribution, and sale of electricity. It generates electricity through fossil-fuel-fired plants, as well as renewable energy and nuclear sources. This segment’s transmission and distribution system includes 214 miles of transmission overhead lines; 188 miles of high-voltage distribution overhead lines; 4 miles of high-voltage distribution underground lines; 4,431 miles of high-voltage distribution overhead lines; 19 miles of high-voltage distribution underground lines; 56,098 miles of electric distribution overhead lines; 10,665 miles of underground distribution lines; and substations.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, CMS is expected to continue to be an important Value Builder.

CMS Energy has a current Value Trend Rating of C (Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. CMS Energy has a poor Appreciation Score of 18 but a very high Power Rating of 88, triggering the Neutral Value Trend Rating.

CMS Energy’s stock is selling well above targeted value. The current stock price of $63.68 compares to targeted value 12 months forward of $43.
CMS Energy’s low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
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CMS Energy has a Power Rating of 88. (CMS’ very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 12% of companies in the universe.)
Factors contributing to this very high Power Rating include: is in an extremely strong phase current; recent price action has been favorable; and earnings estimate behavior for CMS has been slightly favorable recently.

INVESTMENT PROFILE

CMS Energy’s financial strength is below average. Financial strength rating is 30.
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Relative to the S&P 500 Composite, CMS Energy Corp has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that CMS is normal risk. Relative weaknesses include: low financial strength, high financial leverage, and low expected growth. CMS Energy’s valuation is moderate: moderate dividend yield, high P/E ratio, and moderate price/book ratio. CMS has low market capitalization.

CURRENT SIGNALS

CMS Energy’s current operations are strong. Return on equity is rising, reflecting: and rising tax keep rate.

CMS Energy’s current technical position is very strong. The stock price is in a 52.7 month up move. The stock has appreciated 104.3% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

CMS Energy Corp (NYSE: CMS). Marginal positive changes in fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated C.
CMS Energy Corp (NYSE: CMS) stock closed at $1.23 on 10/17/19 after a major decline of -11.5%. NORMAL trading volume accompanied the decline. The stock has declined -1.4% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, CMS Energy experienced a significant decline in cash of -$25 million (-13%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$2,095 million. Non-operating sources contributed +$71 million (+3% of EBITDA). Cash taxes contributed +$115 million (+5% of EBITDA). Re-investment in the business amounted to -$2,792 million (-133% of EBITDA). On a net basis, debt investors supplied +$829 million (+40% of EBITDA) while equity investors received -$343 million (-16% of EBITDA).
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CMS Energy’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cms Energy Corp Peer Group as well. In most years, CMS Energy was in the lower quartile and top quartile. Currently, CMS Energy is slightly above median at +3% of EBITDA (+$71 million).

CMS Energy’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cms Energy Corp Peer Group. In most years, CMS Energy was in the top quartile and lower quartile. Currently, CMS Energy is at the upper quartile at +5% of EBITDA (+$115 million).

CMS Energy’s Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Cms Energy Corp Peer Group. In most years, CMS Energy was in the third quartile and second quartile. Currently, CMS Energy is lower quartile at -133% of EBITDA (-$2,792 million).

CMS Energy’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Cms Energy Corp Peer Group. In most years, CMS Energy was in the third quartile and top quartile. Currently, CMS Energy is upper quartile at +40% of EBITDA (+$829 million).

CMS Energy’s Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cms Energy Corp Peer Group as well. In most years, CMS Energy was in the second quartile and top quartile. Currently, CMS Energy is slightly below median at -16% of EBITDA (-$343 million).

CMS Energy’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cms Energy Corp Peer Group as well. In most years, CMS Energy was in the third quartile and top quartile. Currently, CMS Energy is substantially below median at -1% of EBITDA (-$25 million).
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CMS Energy’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cms Energy Corp Peer Group as well. In most years, CMS Energy was in the top quartile and second quartile. Currently, CMS Energy is above median at +3%.

PROFITABILITY

CMS Energy’s return on equity has improved modestly since 2009 accelerating sharply after the 2017 level.
This modest improvement was due to very small positive trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of CMS Energy’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
More than offsetting this trend, however, pretax margin enjoyed a very strong overall uptrend but it recently stabilized from the 2013 level.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
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CMS Energy’s return on equity is upper quartile (12.0%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (2.8%) reflecting asset turnover that is at the upper quartile (0.27X) and lower quartile pretax margin (10.1%).
Tax “keep” rate (income tax management) is at median (82.9%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (5.21X).

GROWTH RATES

There are no significant differences between CMS Energy’s longer term growth and growth in recent years.
CMS Energy’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -1.1% per year.

Total asset growth has been 3.6% per year.

Annual E.P.S. growth has been 7.3% per year.

Equity growth has been 4.7% per year.

CMS Energy’s consensus growth rate forecast (average of Wall Street analysts) is 6.9% — above the average of the historical growth measures.
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Relative to the Cms Energy Corp Peer Group, CMS Energy’s historical growth measures are erratic. E.P.S. growth (7.3%) has been upper quartile. Equity growth (4.7%) has been above median. Total asset growth (3.6%) has been at median. Revenue growth (-1.1%) has been slightly below median.

Consensus growth forecast (6.9%) is upper quartile.
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PRICE HISTORY

Over the full time period, CMS Energy’s stock price performance has been highly stable and superior. Between December, 2008 and October, 2019, CMS Energy’s stock price rose +530%; relative to the market, this was a +90% gain. Significant price move during the period: 1) December, 2008 – September, 2019: +533%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 34.1% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of 34.1% is upper quartile relative to CMS Energy Corp Peer Group.

Current 5-year total return performance of 20.2% is upper quartile relative to the S&P 500 Composite.
Through September, 2019, with upper quartile current 5-year total return of 20.2% relative to S&P 500 Composite, CMS Energy’s total return performance is upper quartile relative to CMS Energy Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CMS’ overall valuation is high. The highest factor, the price/earnings ratio, is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/revenue is above median. Price/equity ratio is slightly above median. The lowest factor, the ratio of enterprise value/assets, is below median.

Relative to CMS Energy Corp Peer Group, CMS’ overall valuation is quite high. The highest factor, the price/equity ratio, is upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/earnings before interest and taxes is at the upper quartile. Ratio of enterprise value/assets is upper quartile. The lowest factor, the ratio of enterprise value/revenue, is at median.
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CMS Energy has a very large value gap compared to median valuation. For CMS to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 4.35X to 3.52X. If CMS’ ratio of enterprise value/revenue were to decline to 3.52X, its stock price would be lower by $-20 to $43.
For CMS to achieve upper quartile valuation relative to the CMS Energy Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 4.35X to 4.71X. If CMS’ ratio of enterprise value/revenue were to rise to 4.71X, its stock price would increase by $9 from the current level of $64.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, CMS is expected to continue to be an important Value Builder.
CMS Energy’s current Price Target of $43 represents a -32% change from the current price of $63.68.
CMS Energy’s low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 18, the high Power Rating of 88 results in an Value Trend Rating of C.
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CMS Energy’s current Price Target is $43 (+22% from the 2018 Target of $35 but -32% from the 10/17/19 price of $63.68). This rise in the Target is the result of a +9% increase in the equity base and a +12% increase in the price/equity multiple. The forecasted increase in growth has a large positive impact on the price/equity multiple and the forecasted increase in return on equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 14.8% — in line with our recent forecasts. Forecasted return on equity exhibited a modest, steady increase between 2010 and 2018. The current forecast is above the 2010 low of 12%.

PTR’s growth forecast is 7.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2011 and 2018. The current forecast is well above the 2013 low of 0%.

PTR’s cost of equity forecast is 9.4% — in line with recent levels. Forecasted cost of equity exhibited a modest, steady increase between 2010 and 2018. The current forecast is steady at the 2010 low of 7.6%.
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At CMS Energy’s current price of $63.68, investors are placing a positive value of $32 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 14.0% versus a cost of equity of 8.7%.
PTR’s 2020 Price Target of $43 is based on these forecasts and reflects an estimated value of existing assets of $36 and a value of future investments of $7.

About John Lafferty 52629 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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