Renewable Investments And Decisive Partnerships Set To Spark Utility's Financial Revival

Key Takeaways

• Regulatory changes and strategic investments in infrastructure and renewable energy are poised to enhance operational efficiency and revenue growth.
  
• Partnerships with major companies and a substantial capital plan aim to secure long-term growth and improve the financial position without new equity issuance.
  
• Leadership changes and financial strategies subject to regulatory, environmental, and operational challenges may hinder growth and affect investor confidence.

Catalysts

Engages in the generation, transmission, distribution, and sale of electricity in the United States.

• Demand growth driven by new large-scale customers and infrastructure investment is expected to increase revenue by contributing to weather-normalized demand growth of 2% to 3% through 2028.
  
• Regulatory support and legislative changes in Kansas, such as House Bill 2527, which enhances the framework for electric infrastructure investment, are likely to improve the regulatory environment, potentially increasing rate base growth and reducing regulatory lag.
  
• Investment in renewable energy and grid modernization as part of the updated integrated resource plan (IRP) is anticipated to increase operational efficiency and reduce operating costs, likely improving net margins over time.
  
• Economic development with major companies like Google, Panasonic, and Meta establishes a foundation for long-term load growth, enhancing revenue and contributing to the utility’s stability and growth potential.
  
• Ongoing infrastructure investments driven by the $12.5 billion capital plan, without the need for new equity issuance through 2026, are expected to strengthen the company’s financial position and support sustained EPS growth, targeting an annual growth rate of 4% to 6% from 2023 to 2026.

Assumptions

• Analysts are assuming Evergy's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.1% today to 16.2% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $4.32) by about September 2027, up from $739.3 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 16.7x on those 2027 earnings, down from 18.6x today. This future PE is lower than the current PE for the US Electric Utilities industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The resignation of the Chief Financial Officer and the transition to an Acting CFO could create uncertainty and affect investor confidence, potentially impacting the company's share price.
  
• Evergy's reliance on weather conditions for improved earnings, as seen with the warmer start to the summer driving a significant portion of their EPS increase, introduces volatility and unpredictability in future revenues.
  
• Increased operations and maintenance costs, as well as higher depreciation & amortization and interest expenses, might squeeze margins and reduce net income over time if these trends continue.
  
• The heavy investment required for transitioning to a more diverse fuel mix, including renewables and new generation resources, could strain capital and increase the debt profile, impacting net margins due to higher interest expenses.
  
• Regulatory and legislative challenges, as discussed with the need for a competitive framework for electric infrastructure investment and capital structure discussions in Kansas, could introduce compliance costs and delay potential growth opportunities, affecting earnings potential.

Valuation

• The analysts have a consensus price target of $61.42 for Evergy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.2 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 5.8%.
• Given the current share price of $59.76, the analyst's price target of $61.42 is 2.7% 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.