Black Hills Corp

Black Hills Corp is assigned a 5-star quantitative star rating, reflecting our opinion that this share class offers a compelling opportunity for investors. The stock currently trades at a 13% discount to our quantitative fair value estimate of $81.07 per share, which is reinforced by this estimate's low uncertainty rating.

The company's valuation metrics strengthen our fair value estimate. A company's valuation metrics provide insights into the market's expectations for its future growth and profitability. Reflecting the firm's valuation is its book value yield of 72.9%, which sits in the top 45% globally. The market price is low relative to the book (accounting) value of the company's equity, which contributes to our view that shares are cheap.

The company's balance sheet is an additional encouraging factor. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. The firm's EBITDA/interest coverage ratio of 4.0, a core component of leverage, ranks in the bottom 30% compared with peers globally. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. This characteristic further promotes our favorable price/fair value ratio.

In addition to the aforementioned drivers, our model considers momentum as part of its comprehensive analysis. This share class has outperformed the broader universe over the past year. While we believe the stock is undervalued, this outperformance had a negative impact on our valuation estimate.

With its quantitative economic moat rating of none, this business is unlikely to consistently outearn its cost of capital without structural protection from competition. Additionally, the firm's moderate financial health score suggests it is acceptably positioned against adverse economic circumstances.