Clean Energy And Decisive Growth Propel Future Revenue And Earnings

Key Takeaways

• Focus on regulated investments and cleaner energy in the capital plan can enhance rate base and revenue growth.
  
• Expansion in data centers, manufacturing, and regulatory approvals can unlock new revenue streams and bolster earnings.
  
• Regulatory and financial uncertainties, including tariffs and funding needs, may threaten future revenue, margins, and earnings amid supply chain and currency challenges.

Catalysts

Operates as an electric and gas utility company in Canada, the United States, and the Caribbean countries.

• Fortis' new 5-year capital plan of $26 billion, with a focus on regulated investments and a transition to cleaner energy resources, supports expected rate base growth of 6.5% through 2029, which should drive future revenue and earnings growth.
  
• The expansion of data center and manufacturing opportunities, particularly in Arizona, offers potential upside to the existing capital plan and could enhance sales growth and revenue.
  
• The MISO long-range transmission plan (LRTP) and projects such as those in Southern Minnesota and Michigan are expected to bring significant investment opportunities ($3 billion for ITC alone), positively impacting future earnings.
  
• Progress in securing regulatory approval outside of standard tariffs for new retail growth can unlock additional capital deployment and revenue streams, further bolstering net margins through infrastructure investments.
  
• FortisAlberta's anticipated realization of higher rate base growth driven by customer expansion and increased investments in Alberta can support earnings and revenue growth in the medium to long term.

Fortis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortis's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.9% today to 14.7% in 3 years time.
• Analysts expect earnings to reach CA$1.9 billion (and earnings per share of CA$3.7) by about November 2027, up from CA$1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2027 earnings, up from 19.0x today. This future PE is lower than the current PE for the CA Electric Utilities industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.57%, as per the Simply Wall St company report.

Fortis Future Earnings Per Share Growth

Risks

• Regulatory uncertainties, such as the potential need for special tariffs to accommodate large new customers and impacts of political changes, could pose risks to both planned and future revenue streams.
  
• Increasing finance costs and potential need for additional funding through instruments like the At-The-Market (ATM) program may exert pressure on net margins and earnings.
  
• Rate base growth, while currently projected, could be impacted by supply chain issues and the need for regulatory approval for certain tariffs, affecting future revenue growth.
  
• The company's reliance on regulated investments and potential regulatory challenges (e.g., ROE reductions or compliance adjustments) could adversely impact expected earnings and margins.
  
• Currency fluctuations and the need for effective hedging strategies could impact the reported earnings and financial stability, particularly due to variance in U.S. to Canadian dollar rates.

Valuation

• The analysts have a consensus price target of CA$60.21 for Fortis 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$65.0, and the most bearish reporting a price target of just CA$43.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$13.1 billion, earnings will come to CA$1.9 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of CA$60.72, the analyst's price target of CA$60.21 is 0.8% lower. 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.