Delays In Southeast Gateway Will Adversely Affect Future Earnings

Key Takeaways

• Five new growth projects could face challenges, affecting revenue growth and leading to perceptions of an overvalued stock.
  
• Ambitious project pipeline and reliance on strategic partnerships risk financial strain and reduced earnings if costs exceed projections or external factors disrupt plans.
  
• Strategic asset placement, operational achievements, and capital efficiency may stabilize earnings, drive revenue growth, and enhance financial flexibility for TC Energy.

Catalysts

Operates as an energy infrastructure company in North America.

• TC Energy has announced five new growth projects anticipated to add significant capacity, yet if these are not successful or faced with unforeseen challenges, it may affect anticipated revenue growth and lead to the perception of an overvalued stock.
  
• The company's involvement with Bruce Power requires substantial investment into the nuclear refurbishment and potential expansion, which may impact future net margins if cost estimates exceed projections.
  
• The success of the new projects, including the Southeast Gateway with CFE in Mexico, is heavily reliant on maintaining strategic partnerships and regulatory approvals. Delays or cost overruns in these initiatives could adversely affect future earnings.
  
• There are ongoing trade negotiations between the U.S., Canada, and Mexico, and any adverse outcomes could potentially affect revenue, particularly in energy markets, highlighting vulnerability to external economic factors and causing investors to perceive future financial instability.
  
• TC Energy's ambitious project pipeline might strain financial resources, especially if macroeconomic conditions worsen and increase construction costs, potentially compressing net margins and leading to reduced earnings expectations.

TC Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TC Energy's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.5% today to 26.0% in 3 years time.
• Analysts expect earnings to reach CA$4.3 billion (and earnings per share of CA$4.18) by about March 2028, up from CA$4.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, up from 15.9x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 10.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.63%, as per the Simply Wall St company report.

TC Energy Future Earnings Per Share Growth

Risks

• TC Energy has significantly strengthened its balance sheet by reducing net capital expenditures and successfully placing $7 billion of assets into service, which could enhance financial flexibility and potentially stabilize earnings.
  
• The completion of major projects such as the Southeast Gateway and Coastal GasLink, along with strong operational achievements, may contribute to steady revenue streams due to long-term take-or-pay contracts and regulated cost frameworks.
  
• Anticipated growth in natural gas and electricity demand through projects like LNG exports and nuclear power generation aligns with TC Energy's North American footprint and could drive significant revenue growth.
  
• TC Energy's strategic focus on capital efficiency, along with ongoing efforts to fill its project capacity with low-risk, high-return projects, provides visibility on sustained EBITDA growth, impacting net margins positively.
  
• The company’s continuous improvement in safety and operational performance contributes to strong financial results, which may support higher reliability and cost efficiency, enhancing overall earnings.

Valuation

• The analysts have a consensus price target of CA$70.6 for TC Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$79.0, and the most bearish reporting a price target of just CA$39.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$16.4 billion, earnings will come to CA$4.3 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of CA$66.79, the analyst price target of CA$70.6 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.