What is OGS's Intrinsic value?

ONE Gas Inc (OGS) Intrinsic Value Analysis

Executive Summary

As of June 21, 2025, ONE Gas Inc's estimated intrinsic value ranges from $6.92 to $77.09 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $77.09 +7.0%
Discounted Cash Flow (5Y) $75.74 +5.1%
Dividend Discount Model (Multi-Stage) $54.68 -24.1%
Dividend Discount Model (Stable) $58.79 -18.4%
Earnings Power Value $6.92 -90.4%

Is ONE Gas Inc (OGS) undervalued or overvalued?

With the current market price at $72.08, the stock appears to be moderately overvalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate ONE Gas Inc's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 0.49 0.54
Cost of equity 6.1% 7.9%
Cost of debt 4.0% 6.1%
Tax rate 15.8% 16.7%
Debt/Equity ratio 0.77 0.77
After-tax WACC 4.9% 6.7%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 5.8% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $2,084 (FY12-2024) to $2,601 (FY12-2034)
  • Net profit margin expansion from 11% to 10%
  • Capital expenditures maintained at approximately 29% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $76 $7,732M 79.1%
10-Year Growth $77 $7,813M 62.5%
5-Year EBITDA $62 $6,930M 76.7%
10-Year EBITDA $69 $7,316M 60.0%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 62.7%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 7.0%
  • Long-term growth rate: 1.0%
  • Fair value: $54.68 (-24.1% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 7.9% (Low) to 6.1% (High)
  • Long-term growth rate: 0.5% (Low) to 1.5% (High)
  • Fair value range: $38 to $79
  • Selected fair value: $58.79 (-18.4% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $204M
Discount Rate (WACC) 6.7% - 4.9%
Enterprise Value $3,060M - $4,155M
Net Debt $3,193M
Equity Value $(133)M - $963M
Outstanding Shares 60M
Fair Value $(2) - $16
Selected Fair Value $6.92

Key Financial Metrics

Metric Value
Market Capitalization $4320M
Enterprise Value $7513M
Trailing P/E 17.78
Forward P/E 19.30
Trailing EV/EBITDA 6.35
Current Dividend Yield 349.98%
Dividend Growth Rate (5Y) 6.91%
Debt-to-Equity Ratio 0.77

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 30% $23.13
Discounted Cash Flow (5Y) 25% $18.93
Dividend Discount Model (Multi-Stage) 20% $10.94
Dividend Discount Model (Stable) 15% $8.82
Earnings Power Value 10% $0.69
Weighted Average 100% $62.51

Investment Conclusion

Based on our comprehensive valuation analysis, ONE Gas Inc's weighted average intrinsic value is $62.51, which is approximately 13.3% below the current market price of $72.08.

Key investment considerations:

  • Strong projected earnings growth (11% to 10% margin)
  • Consistent cash flow generation
  • Historical dividend growth of 6.91%

Given these factors, we believe ONE Gas Inc is currently moderately overvalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.