Expansion And Growth On The Horizon Amidst Margin Squeezes And Valuation Challenges

Key Takeaways

• Expansion efforts, including LEAP Phase 4 and Stonewall system upgrades, aim to boost revenue by meeting growing energy demands.
  
• Investment-grade credit rating upgrade may reduce interest expenses and improve net margins, enhancing future earnings.
  
• DT Midstream's increase in EBITDA guidance, strategic expansions, and Fitch Ratings upgrade hint at strong growth prospects and improved financial positioning.

Catalysts

Provides integrated natural gas services in the United States.

• The company announced the LEAP Phase 4 expansion set to increase capacity by 200 million cubic feet per day, indicating future growth expectations; such expansion is expected to drive increased revenue by serving growing demand in the Gulf Coast and LNG markets.
  
• Upsizing the Stonewall system to connect with the Mountain Valley Pipeline will add capacity and provide access to Mid-Atlantic markets, which could lead to increased revenue from new demand-based contracts.
  
• The ongoing development of power and data center opportunities suggests future growth prospects by tapping into increasing energy demand trends, which could enhance revenue streams.
  
• Continued investment and advancement in the carbon capture and storage project in Louisiana, dependent on regulatory approval, suggests potential future revenue streams and possible improvement in net margins due to lower emissions costs.
  
• The upgrade to investment-grade credit rating by Fitch is a catalyst for lowering interest expenses and potentially improving net margins, which could enhance earnings in the future.

DT Midstream Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DT Midstream's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.2% today to 40.6% in 3 years time.
• Analysts expect earnings to reach $486.4 million (and earnings per share of $4.96) by about November 2027, up from $402.0 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 21.6x on those 2027 earnings, down from 24.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

DT Midstream Future Earnings Per Share Growth

Risks

• DT Midstream announced strong operational performance and increased its 2024 adjusted EBITDA guidance, suggesting resilience and potential for revenue and earnings growth.
  
• The company received an investment-grade upgrade from Fitch Ratings, which could lead to lower interest costs and improved net margins.
  
• Expansion plans like LEAP Phase 4, supported by long-term contracts, highlight potential future revenue growth through increased capacity and strategic positioning in the LNG market.
  
• Their focus on growth through organic projects and strategic asset integration could enhance future earnings and margins by optimizing existing infrastructure.
  
• The growth in natural gas demand, driven by LNG exports and industrial needs, may boost utilization of DTM's assets, positively impacting revenue and earnings.

Valuation

• The analysts have a consensus price target of $86.17 for DT Midstream 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 $100.0, and the most bearish reporting a price target of just $69.71.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $486.4 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.6%.
• Given the current share price of $103.03, the analyst's price target of $86.17 is 19.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.