Investing In Renewable Energy Will Strengthen Future Market Position

Key Takeaways

• Increase in renewable energy and strategic acquisitions could enhance revenue and profitability, reducing reliance on fossil fuels and improving margins.
  
• Regulatory improvements and grid investment may lower costs and stabilize earnings, encouraging long-term growth and enhanced earnings per share.
  
• Endesa faces challenges from competition, regulatory uncertainties, falling electricity prices, capital deployment risks, and market volatility impacting margins and earnings stability.

Catalysts

Engages in the generation, distribution, and sale of electricity in Spain, Portugal, France, Germany, Morocco, Italy, the United Kingdom, Switzerland, Luxembourg, the Netherlands, Singapore, and internationally.

• The increase in renewable energy output, particularly from hydro and solar, signals significant growth potential, which can boost future revenue streams and contribute to better net margins as reliance on fossil fuels decreases.
  
• Regulatory improvements, including a supportive capacity market and potential changes in nuclear power taxation, could lower operating costs and enhance earnings predictability, positively impacting net income and margins.
  
• The acquisition of hydro assets and a strategic focus on high-value customers in the liberalized segment may drive revenue growth and enhance profitability through improved customer loyalty and better pricing power.
  
• Continued investment in grid modernization and expansion aligns with national energy targets, supporting long-term revenue growth and efficiency, potentially widening net margins by leveraging economies of scale.
  
• Operational efficiencies, cost-cutting measures, and a positive outlook on gas and power margins indicate potential earnings growth, which could lead to higher EPS as financial management strategies further stabilize cash flow.

Endesa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Endesa's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.0% today to 8.0% in 3 years time.
• Analysts expect earnings to reach €2.0 billion (and earnings per share of €1.93) by about April 2028, up from €1.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 13.9x today. This future PE is lower than the current PE for the GB Electric Utilities industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Endesa Future Earnings Per Share Growth

Risks

• The historically high churn rate in the liberalized power sales market reflects a highly competitive environment, which could challenge Endesa's ability to grow revenues and maintain margins.
  
• The potential impact of regulatory changes on distribution remuneration and investment appeal remains uncertain, posing risks to future revenue streams and overall financial performance.
  
• The significant decrease in average electricity market prices, influenced by increased renewable generation, might reduce power generation revenues and pressure integrated power margins.
  
• Delays or unfavorable outcomes in regulatory updates, such as the distribution remuneration scheme, could affect planned capital deployments and long-term revenue projections.
  
• Exposure to volatile commodity prices and market conditions, especially in gas, could adversely impact Endesa's margins and earnings stability, despite hedging efforts.

Valuation

• The analysts have a consensus price target of €24.239 for Endesa 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 €28.0, and the most bearish reporting a price target of just €20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €25.5 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.1%.
• Given the current share price of €24.86, the analyst price target of €24.24 is 2.6% 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.