BUSINESS
TransAlta Corporation owns, operates, and develops a diverse fleet of electrical power generation assets in Canada, the United States, and Australia. It operates through four segments: Hydro, Wind and Solar, Gas, and Energy Transition. owns and operates hydro, wind and solar, natural gas-fired, and coal-fired facilities. The company also engages in wholesale trading of electricity and other energy-related commodities and derivatives; and related mining operations and natural gas pipeline operations. It serves municipalities, medium and large industries, businesses, and utility customers. The company was founded in 1909 and is headquartered in Calgary, Canada.
INVESTMENT RATING
TAC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.
TransAlta has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. TransAlta has a very low Power Rating of 14 and a very low Appreciation Score of 7, resulting in the Lowest Value Trend Rating.
TransAlta’s stock is selling significantly above targeted value. The current stock price of $7.01 compares to targeted value 12 months forward of $3.
TransAlta’s very low appreciation potential results in an appreciation score of 7 (93% of the universe has greater appreciation potential.)
TransAlta has a Power Rating of 14. (TAC’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 14% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been unfavorable; the Electric Services comparison group is currently in an unfavorable position; and the trend in TAC’s earnings estimates has been unfavorable in recent months.
INVESTMENT PROFILE
TransAlta’s financial strength is poor. Financial strength rating is 10.
Relative to the S&P 500 Composite, TransAlta Corp has both Growth and Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that TAC is higher risk. High expected growth is a positive for TransAlta. Relative weaknesses include: low historical profitability, low financial strength, high financial leverage, low historical growth, and high earnings variability. TransAlta’s valuation is moderate: moderate dividend yield, high P/E ratio, and moderate price/book ratio. TAC has unusually low market capitalization.
CURRENT SIGNALS
TransAlta’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.
TransAlta’s current technical position is very weak. The stock price is in a 6.3 month down move. The stock has declined 24.6% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
TransAlta Corp (NYSE: TAC) suffers from notable negative changes in investment behavior: the stock fell on very heavy volume.
TransAlta Corp (NYSE: TAC) suffers from important negative changes in fundamentals: the consensus estimate for December, 2024 decreased significantly, significant quarterly earnings deceleration occurred, and the consensus estimate for December, 2025 decreased significantly.
The stock is currently rated F.
TransAlta Corp (NYSE: TAC) stock closed at $7.01 on 2/26/24 after a decline of -4.4%. Moreover, exceptionally high trading volume at 215% of normal accompanied the decline. The stock has risen 0.6% during the last week but has been weak relative to the market over the last nine months.
CASH FLOW
In 2023, TransAlta experienced a very significant reduction in cash of -$574 million (-65%). Sources of cash were much lower than uses. Cash generated from 2023 EBITDA totaled +$1,223 million. Non-operating sources contributed +$93 million (+8% of EBITDA). Cash taxes consumed -$31 million (-3% of EBITDA). Re-investment in the business amounted to -$1,389 million (-114% of EBITDA). On a net basis, debt investors removed -$286 million (-23% of EBITDA) while equity investors received -$183 million (-15% of EBITDA).
TransAlta’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Transalta Peer Group. (Since 2021 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, TransAlta was in the top quartile and second quartile. Currently, TransAlta is at the upper quartile at +8% of EBITDA (+$93 million).
TransAlta’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Transalta Peer Group. In most years, TransAlta was in the third quartile and lower quartile. Currently, TransAlta is below median at -3% of EBITDA (-$31 million).
TransAlta’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Transalta Peer Group. (Since 2021 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, TransAlta was in the top quartile and second quartile. Currently, TransAlta is lower quartile at -114% of EBITDA (-$1,389 million).
TransAlta’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Transalta Peer Group. In most years, TransAlta was in the second quartile and lower quartile. Currently, TransAlta is slightly above median at -23% of EBITDA (-$286 million).
TransAlta’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Transalta Peer Group. In most years, TransAlta was in the lower quartile and second quartile. Currently, TransAlta is slightly above median at -15% of EBITDA (-$183 million).
TransAlta’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Transalta Peer Group. (Since 2020 Change in Cash, %EBITDA has accelerated very sharply.) In most years, TransAlta was in the top quartile and second quartile. Currently, TransAlta is lower quartile at -47% of EBITDA (-$574 million).
TransAlta’s Cash, %Revenue has enjoyed a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Transalta Peer Group. In most years, TransAlta was in the third quartile and second quartile. Currently, TransAlta is at the lower quartile at +12%.
PROFITABILITY
TransAlta’s return on equity has improved very significantly since 2014. The current level is 114.0% versus the high of 7.8% and the low of -83.9%.
TransAlta’s very strong positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of TransAlta’s assets rose over the full period 2014-2023: asset turnover has enjoyed a very strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
TransAlta’s return on equity is upper quartile (114.0%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is above median (9.9%) reflecting asset turnover that is at the upper quartile (0.38X) and at median pretax margin (26.0%).
Tax “keep” rate (income tax management) is at median (78.9%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is upper quartile (14.55X).
GROWTH RATES
There are no significant differences between TransAlta’s longer term growth and growth in recent years.
TransAlta’s historical income statement growth has been higher than growth in the balance sheet. Revenue growth has exceeded asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 3.1% per year.
Total asset growth has been -1.9% per year.
Annual E.P.S. growth has been -6.8% per year.
Equity growth has been -19.6% per year.
TransAlta’s consensus growth rate forecast (average of Wall Street analysts) is 157.4% — substantially above the average of the historical growth measures.
Relative to the Transalta Peer Group, TransAlta’s historical growth measures are erratic. Total asset growth (-1.9%) has been substantially below median. Revenue growth (3.1%) has been at the lower quartile. E.P.S. growth (-6.8%) has been lower quartile. Equity growth (-19.6%) has been lower quartile.
Consensus growth forecast (157.4%) is at the upper quartile.
PRICE HISTORY
Over the full time period, TransAlta’s stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, TransAlta’s stock price fell -52%; relative to the market, this was a -85% loss. Significant price move during the period: 1) March, 2020 – July, 2022: +118%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -24.2% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of -24.2% is lower quartile relative to TransAlta Corp Peer Group.
Current 5-year total return performance of 7.7% is below median relative to the S&P 500 Composite.
Through January, 2024, with below median current 5-year total return of 7.7% relative to S&P 500 Composite, TransAlta’s total return performance is at the lower quartile relative to TransAlta Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, TAC’s overall valuation is quite low. The highest factor, the price/equity ratio, is at median. Ratio of enterprise value/revenue is at the lower quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
Relative to TransAlta Peer Group, TAC’s overall valuation is low. The highest factor, the price/equity ratio, is at the upper quartile. Ratio of enterprise value/assets is below median. Price/earnings ratio is at the lower quartile. Ratio of enterprise value/revenue is lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
TransAlta has a major value gap compared to the median. For TAC to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.01X to 2.66X. If TAC’s ratio of enterprise value/revenue were to rise to 2.66X, its stock price would be higher by $6 to $13.
For TAC to achieve upper quartile valuation relative to the TransAlta Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.01X to 3.74X. If TAC’s ratio of enterprise value/revenue were to rise to 3.74X, its stock price would increase by $15 from the current level of $7.01.
VALUE TARGETS
TAC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.
TransAlta’s current Price Target of $2 represents a -65% change from the current price of $7.01.
TransAlta’s very low appreciation potential results in an appreciation score of 7 (93% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 7, the low Power Rating of 14 contributes to an Value Trend Rating of F.
TransAlta’s current Price Target is $2 (-90% from the 2023 Target of $25 and -65% from the 02/26/24 price of $7.01). This dramatic fall in the Target is the result of a -44% decrease in the equity base and a -83% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted decline in cost of equity has a huge positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted decline in return on equity has a very large negative impact.
PTR’s return on equity forecast is 5.2% — significantly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is steady at the 2021 low of 4%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth erratic between 2015 and 2023. The current forecast is steady at the 2015 peak of 0%.
PTR’s cost of equity forecast is 3.0% — significantly below recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2015 and 2023. The current forecast is below the 2015 peak of 7.6%.
At TransAlta’s current price of $7.01, investors are placing a positive value of $0 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 135.5% versus a cost of equity of 13.5%.
PTR’s 2025 Price Target of $2 is based on these forecasts and reflects an estimated value of existing assets of $6 and a value of future investments of $-3.
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