Valuation Scorecard: Stock Rating F-Lowest (2/28/24)-TransAlta Corp (TAC).

TransAlta’s common shares will need to reach $12 to achieve average annual stock market performance of 9.0% over the next 6 years. TransAlta’s stock price will need to reach $14 by 2029 to achieve upper quartile performance. At the current price of $7, what is the market’s view of TransAlta’s future operating performance?

Executive Summary

• Key TransAlta characteristics: very high profitability, instability, very low expected growth, and low financial strength.
• Very high valuation, below market shareholder returns. Current valuation levels are very high relative to the TransAlta Peer Group. Recent market returns have underperformed the TransAlta Peer Group. Total shareholder returns expected to significantly lag the overall equity market. Based on current investor expectations, TransAlta shares should reach a level of $2 by 2029 — an -13.7% per year total shareholder return. A 2029 stock price of $12 would reflect median performance and a price of $14 would be required to reach upper quartile performance.
• TransAlta’s past growth is slightly below average. Historical growth has been below average relative to the TransAlta Peer Group and forecasted growth is relatively very low. EPS Growth has been superior. Asset Growth, and Equity Growth have lagged. 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 resulting in an improving return on equity. TransAlta’s consensus growth expectations are lower than historical growth.
• Return on Equity is group leading. This factor has strengthened market perceptions of TransAlta. The company has very high excess cash and will have to work to reinvest at attractive returns to support profitability and valuation.
• TransAlta’s risk profile is neutral. Overall variability has been very low with very low revenue variability, only average E.P.S. variability, and only average stock price volatility. Financial Strength is very low and earnings’ expectations are relatively high. The debt/capital ratio has risen.

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