Reassessing Pinnacle West Capital (PNW): A Utility Stock Undervalued Amid Growth Tailwinds?

In the evolving landscape of regulated utilities, Pinnacle West Capital (PNW) has long been a stalwart of steady returns. Over the past five years, the stock has delivered a total shareholder return of approximately 40%, outpacing many peers in the electric utility sector. Yet, as of late 2025, PNW appears to be trading at a discount relative to its intrinsic value, raising questions for contrarian value investors. This analysis examines whether PNW's recent regulatory and infrastructure developments, combined with its attractive valuation metrics, justify a reevaluation of its investment potential-despite near-term headwinds like slowing EPS growth and shifting policy dynamics.

Growth Tailwinds: Infrastructure and Regulatory Developments

PNW's Arizona Public Service (APS) subsidiary has positioned itself as a critical player in meeting the state's surging energy demand. The Desert Sun Power Plant, a 2,000-MW natural gas facility near Gila Bend, Arizona, is a cornerstone of this strategy. Scheduled to begin construction in 2028 and achieve first operations by 2030, the project is part of a $10.35 billion capital expenditure plan from 2025 to 2028. This initiative aligns with APS's "growth pays for growth" model, where large commercial customers-such as data centers and semiconductor manufacturers-will fund the second phase of the project, minimizing the financial burden on residential ratepayers.

The project's regulatory environment, however, is complex. Arizona regulators are in the process of repealing the Renewable Energy Standard, a 2006 rule requiring utilities to source 15% of their electricity from renewables by 2025. While APS has already exceeded this threshold (16% in 2024), the repeal reflects a broader shift toward balancing affordability and reliability. Natural gas, as a flexible and dispatchable resource, is expected to play a larger role in Arizona's energy mix, particularly as the state grapples with the dual pressures of population growth and the retirement of coal-fired plants.

On the infrastructure front, PNW's partnership with the Transwestern Pipeline's Desert Southwest expansion project further underscores its strategic positioning. Energy Transfer LP's upsized pipeline, now estimated to cost $5.6 billion, will increase natural gas transportation capacity to 2.3 billion cubic feet per day, supporting Arizona's energy needs through 2029. This infrastructure investment is critical for ensuring the reliability of PNW's generation fleet, particularly as renewable sources like solar and wind face delays due to federal permitting bottlenecks.

Valuation Metrics: A Contrarian Case for PNW

PNW's valuation appears compelling when viewed through the lens of traditional metrics. As of December 2025, the stock trades at a price-to-earnings (PE) ratio of 17.93, slightly above its 10-year average of 17.53 but below the US Electric Utilities industry average of 19.4x. A Dividend Discount Model (DDM) analysis suggests an intrinsic value of $89.72, just 0.5% above the current share price of $87.30. Meanwhile, a Discounted Cash Flow (DCF) model estimates a fair value of $86.70, indicating that PNW is trading near its intrinsic value.

For contrarian investors, the most intriguing aspect of PNW's valuation lies in its undervaluation relative to long-term growth potential. Under a Base Case DDM scenario, the stock's intrinsic value is estimated at $121.73, implying a 28% undervaluation. This discrepancy suggests that the market may not be fully pricing in the long-term benefits of PNW's $10.35 billion capital plan or its ability to capitalize on Arizona's economic expansion.

Bearish Factors: Slowing EPS Growth and Regulatory Lag

Despite these positives, PNW faces near-term challenges. Earnings per share growth has decelerated, with Q3 2025 results showing a 2.4% decline compared to the same period in 2024. The second quarter of 2025 was particularly weak, with net income dropping 14.8% year-over-year due to milder weather reducing cooling demand. Analysts project EPS of $4.98 for 2025, a 5% decline from prior estimates.

Regulatory uncertainty also looms large. The federal One Big Beautiful Bill Act (OBBBA), signed in July 2025, has eliminated key tax credits for renewable energy projects, jeopardizing $1.6 billion in Arizona solar investments and threatening 4,000 jobs. While PNW's focus on natural gas insulates it from some of these risks, the broader policy shift toward reclassifying renewables as "unreliable" could complicate long-term planning. Additionally, delays in federal permitting for solar and storage projects-due to a new Interior Department order requiring personal approval from Secretary Doug Burgum-have placed over 116 GW of projects at risk.

Conclusion: A Contrarian Opportunity in a Shifting Energy Landscape

For value investors, PNW presents a compelling case. Its robust capital expenditure plan, strategic infrastructure partnerships, and alignment with Arizona's economic growth trajectory position it to deliver long-term value. While near-term EPS growth may lag due to weather and regulatory headwinds, the company's attractive valuation metrics and strong balance sheet suggest that the market is underestimating its resilience.

PNW's ability to navigate the transition from a renewables-centric to a reliability-focused energy model-while maintaining its dividend appeal-could prove pivotal in the coming years. For those willing to look beyond short-term volatility, PNW offers a rare combination of undervaluation, growth tailwinds, and regulatory adaptability in an industry undergoing profound transformation.