AI Demand And Calpine Acquisition Will Empower Data Centers

Key Takeaways

• Rising demand for AI-driven data centers and valuable Calpine acquisition enhance Constellation's revenue and earnings prospects.
  
• Increased entry costs for new technologies make Constellation's energy options more competitive, boosting future revenues and margins.
  
• Execution risks with the Calpine acquisition, potential overinvestment, and regulatory uncertainties threaten revenue and margins despite potential offset by nuclear incentives.

Catalysts

Produces and sells energy products and services in the United States.

• The company anticipates substantial demand for data centers driven by AI technology, which could lead to increased revenue as Constellation provides needed power.
  
• Cost of new entries, such as combined cycle machines and solar with storage, has risen significantly, which could make Constellation's clean and reliable energy options more competitive, potentially improving revenue and margins.
  
• The Calpine acquisition is expected to enhance Constellation's capabilities, and the deal appears increasingly valuable given current replacement costs for similar assets, affecting future revenue and earnings positively.
  
• PTC (production tax credit) inflation adjustments are expected to increase revenues, with an anticipated $500 million in additional base earnings by 2028, impacting overall earnings growth.
  
• Constellation's existing megawatts and the ability to bring additional capacity online quickly give it a strategic advantage, potentially boosting future revenues and margins by offering attractive pricing options compared to new entrants.

Constellation Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Constellation Energy's revenue will decrease by 0.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $11.51) by about May 2028, up from $3.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.7 billion in earnings, and the most bearish expecting $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.1x on those 2028 earnings, up from 28.8x today. This future PE is greater than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Constellation Energy Future Earnings Per Share Growth

Risks

• The company faces execution risk associated with market expansion and the integration of the Calpine acquisition, which may impact expected synergies and net margins.
  
• The demand forecast for data centers may be overstated, leading to potential overinvestment strategies based on projected growth that may not materialize, affecting future revenues.
  
• Regulatory delays and the need for clarity around behind-the-meter and interconnection processes with FERC could lead to increased costs and delayed earnings from anticipated projects.
  
• Volatility in equity markets driven by macroeconomic factors could negatively affect investor sentiment and stock price performance, impacting capital growth opportunities.
  
• Potential recessionary impacts and power price fluctuations represent significant risks to earnings and revenue projections, although offset by nuclear PTC, they could still introduce financial drag.

Valuation

• The analysts have a consensus price target of $280.74 for Constellation 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 $385.0, and the most bearish reporting a price target of just $184.05.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $23.6 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 31.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $273.82, the analyst price target of $280.74 is 2.5% 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.