Pinnacle West Capital Corp (PNW)

Conclusion

Pinnacle West Capital Corporation provides regulated retail and wholesale electricity in Arizona, through generation, transmission and distribution. At the close on 2026-11-09 the share price was 105.26 USD, giving a market capitalisation of 12.8 billion USD and an enterprise value of 29.7 billion USD.

The verdict is fair. The fair value band runs from 80.62 to 120.93 USD, with a midpoint of 100.78 USD and a margin of safety of -4.3% at the current price. The P/E of 19.3x compares with a ten-year median of 18.1x, and EV/EBITDA of 13.1x compares with 10.2x. The fair value from historical multiples is 100.78 USD. The per-share DCF value is not available. The DCF uses a discount rate of 8.9% and long-term growth of 2.5%, starting from negative free cash flow. The growth implied by the price in a reverse DCF is not available either. Revenue compounded at 8.3% over five years, while EPS compounded at 0.7%. The next-year EPS growth estimate is 13.5%.

What supports the case is an operating margin of 20.7%, close to its ten-year median of 20.5%, revenue growth in 9 of 10 comparable years, and a dividend yield of 3.4%. What could break it is leverage and cash generation: net debt to EBITDA of 7.5x, interest coverage of 2.6x, an Altman Z-score of 0.74 in the distress zone, and free cash flow conversion of -141.0% on a trailing basis. Return on invested capital of 4.4% also stays below the weighted average cost of capital of 6.2%.

Financial health

Financial strength is red, held back by four weak measures and none of the measures assessed as good. The current ratio is 0.71 and the quick ratio is 0.40, so short-term liabilities exceed liquid assets. Net debt to EBITDA is 7.46x and interest coverage is 2.64x on a trailing basis. Debt to equity is 2.27. The Altman Z-score is 0.74, in the distress zone. The Altman model was designed for manufacturers, and this company is a regulated utility, so the zone is a weak guide here. Insolvency risk: low, about 2.5% by the estimate of the Ohlson model over one to two years. That estimate is low, but it does not offset the high leverage and thin liquidity in the other ratios.

Earnings quality

Earnings quality is red, mainly because cash generation lags reported profit. Free cash flow conversion is -141.0% on a trailing basis and -112.3% over five years. The accrual ratio is -4.1%. Stock-based compensation is 0.5% of revenue, and free cash flow after it is -958.6 million USD. The share count has grown at 1.6% a year over five years. The Piotroski score is 4 of 9. The Beneish M-score is not available. The company beat earnings expectations in 5 of the last 8 quarters, with an average surprise of 106.9%. Current-year estimates were revised up by 3.1% over 90 days, with five upward revisions and one downward in the last 30 days. Next-year estimates were revised down by 0.8% over 90 days.

Profitability

Profitability is green. The operating margin of 20.7% is in line with its ten-year median of 20.5%, and the gross margin of 41.4% compares with a median of 42.7%. The net margin of 11.6% compares with a median of 13.2%. Return on invested capital is 4.4% against a weighted average cost of capital of 6.2%, and the given difference is -1.8%, so the business does not yet earn its cost of capital. Return on equity is 8.8%. The DuPont split shows a net margin of 11.6%, an asset turnover of 0.17 and an equity multiplier of 4.50 as of 2025-12-31. Most of the return on equity therefore comes from heavy leverage rather than from asset efficiency. Over five years the median return on invested capital was 4.8%.

Growth

Growth is green. Revenue compounded at 7.3% over three years, 8.3% over five years and 4.3% over ten years. Earnings per share compounded at 5.8% over three years, 0.7% over five years and 2.6% over ten years. Revenue grew in 9 of the 10 comparable years. The gap between revenue and EPS growth over five years shows that rising sales have not translated into per-share earnings. The consensus estimate for next year's EPS growth is 13.5%, which would be a sharp change from the five-year record.

Valuation

Valuation is yellow, with the verdict fair and a margin of safety of -4.3%. The P/E of 19.3x compares with a ten-year median of 18.1x, a premium of 6.5%. EV/EBITDA of 13.1x compares with 10.2x, a premium of 27.9%. Price-to-sales of 2.24x is at a discount of 2.4% to its median of 2.29x, and price-to-book of 1.71x is at a premium of 2.4% to its median of 1.67x. The free cash flow yield is -7.3%. The DCF uses a discount rate of 8.9% and long-term growth of 2.5%, but its per-share value is not available. Reverse DCF implied growth is not available. The fair value band of 80.62 to 120.93 USD is built on fixed assumptions, so it is an order of magnitude and not a price target. The dividend yield is 3.4% and the forward yield 3.5%. Free cash flow is negative, so the dividend is not covered by free cash flow.

Risks

The main risk is leverage. A net debt to EBITDA of 7.5x and interest coverage of 2.6x leave little room for a fall in earnings or a rise in borrowing costs. The low current ratio of 0.71 means short-term obligations depend on continued access to funding. Persistent negative free cash flow, with conversion at -141.0%, means investment and dividends rely on borrowing or equity, which raises the share count. Returns below the cost of capital (4.4% against 6.2%) would weigh on value if they persist. Several values are not available: the per-share DCF value, the reverse DCF implied growth and the Beneish M-score. This analysis also has no debt maturity schedule and no revenue by segment, so it cannot test refinancing risk or the mix of regulated and other earnings.