North American Demand Trends Will Expose Overvaluation Risks

Key Takeaways

• Overly optimistic demand and regulatory assumptions could lead to disappointing revenue and margin performance if electrification or decarbonization trends slow or shift.
  
• Continued growth faces risks from rising financing costs, aggressive competition, and challenges integrating new assets, potentially compressing margins and limiting earnings improvements.
  
• Diversified growth, operational upgrades, financial agility, and exposure to favorable market trends position Capital Power for stable long-term expansion and improved shareholder value.

Catalysts

Develops, acquires, owns, and operates renewable and thermal power generation facilities in Canada and the United States.

• Investors may be assuming that projected electricity demand growth in North America, especially from data centers and electrification trends, will over-absorb Capital Power's available capacity; however, if demand growth is less robust or project timelines slip (including Alberta data center allocations), long-term revenue uplift may disappoint.
  
• Market consensus appears to be heavily favoring the narrative that regulatory changes and decarbonization efforts will insulate Capital Power's efficient gas fleet from carbon risk, but if clean electricity regulations accelerate or offset markets become less favorable, future earnings and net margin stability could be overstated.
  
• Expectations of continued low-cost financing-driven by Capital Power's growing ESG profile and investment-grade credit ratings-may not be sustainable if interest rates remain higher for longer; this could increase cost of capital and compress earnings growth.
  
• Optimism around stable and rising revenue streams seems to be predicated on the ability to recontract existing capacity at high prices and secure long-term PPAs, yet an oversupply of new renewables and ongoing competitive pressure may compress margins and limit future revenue growth.
  
• The assumption that diversified exposure to merchant markets and rapid M&A-driven asset growth will consistently translate into EBITDA and AFFO improvement may ignore risks tied to integration, market saturation, or unexpected execution delays, resulting in earnings growth that underperforms current elevated expectations.

Capital Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Capital Power's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.4% today to 12.8% in 3 years time.
• Analysts expect earnings to reach CA$521.7 million (and earnings per share of CA$3.68) by about July 2028, down from CA$614.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.7x on those 2028 earnings, up from 15.7x today. This future PE is greater than the current PE for the CA Renewable Energy industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Capital Power Future Earnings Per Share Growth

Risks

• Structural electricity demand growth from trends like electrification, increased data center and AI-driven compute, and grid reliability challenges could drive sustained long-term power needs in North America, supporting revenue and offtake opportunities for Capital Power's growing diversified fleet.
  
• Capital Power has reduced market concentration risk by expanding into U.S. merchant markets such as PJM and MISO, giving it resilience, improved contract renegotiation leverage, and reducing earnings volatility, all of which could support more stable and growing cash flows over time.
  
• Operational efficiency gains and successful asset upgrades (e.g., Genesee repowering, planned optimizations at newly acquired PJM assets) are lowering emissions costs, improving spark spreads, reducing carbon tax exposure, and extending asset life, which enhance net margins and support EBITDA expansion.
  
• The company maintains access to multiple pools of low-cost, investment-grade capital, as evidenced by oversubscribed U.S. debt issuances and prudent leverage, allowing continued investments in high-quality projects and dividend growth without dilutive equity issuance-supporting earnings and shareholder returns.
  
• A strong pipeline of accretive organic (development/expansion) and inorganic (M&A) opportunities, along with positive long-term industry trends such as supportive regulatory frameworks, rising capacity prices, and higher demand for long-term renewable PPAs, could drive multi-year growth in revenue and AFFO, increasing share price potential despite sector headwinds.

Valuation

• The analysts have a consensus price target of CA$66.727 for Capital Power 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$76.0, and the most bearish reporting a price target of just CA$60.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$4.1 billion, earnings will come to CA$521.7 million, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of CA$62.28, the analyst price target of CA$66.73 is 6.7% 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.