Planned $38 Billion Investment Will Support Energy Transformation And Transmission Expansion

Key Takeaways

• Significant investments in transmission and operational excellence are expected to drive revenue and earnings growth, with a positive earnings outlook.
  
• Favorable regulatory activities and strategic project wins support stable net margins and increase future revenue potential.
  
• Regulatory and financial challenges, including high capital needs and reliance on support, could impact Exelon's revenue growth and margins amidst external economic pressures.

Catalysts

A utility services holding company, engages in the energy distribution and transmission businesses.

• Exelon plans to invest $38 billion from 2025 to 2028, with over $30 billion focused on transmission to support customer needs and energy transformation, likely impacting revenue growth.
  
• The projected annual earnings growth is 5% to 7% through 2028, supported by steady investments and a focus on operational excellence, indicating positive earnings outlook.
  
• Opportunities like the MISO Tranche 2.1 work, which are not in current guidance but could require $10 to $15 billion in additional investment, suggest potential for further revenue and earnings growth.
  
• Exelon is engaged in regulatory activities that have resulted in favorable rate cases ensuring cost recovery and stability, supporting net margins and earnings.
  
• Increased high-density load pipeline and ComEd winning significant projects are expected to drive 1% to 2% load growth, enhancing revenue streams.

Exelon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Exelon's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $3.1 billion (and earnings per share of $2.97) by about March 2028, up from $2.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.6x on those 2028 earnings, down from 18.2x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.8x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.25%, as per the Simply Wall St company report.

Exelon Future Earnings Per Share Growth

Risks

• Regulatory challenges, including busy rate case activity and the need for effective cost recovery mechanisms, could lead to potential delays or unfavorable outcomes that might impact Exelon's revenue and earnings growth.
  
• High levels of capital required for transmission projects and the energy transformation could lead to increased financial leverage or dilution if Exelon needs to raise additional equity, potentially impacting net margins and earnings.
  
• External factors such as generationally high inflation and interest rates could adversely affect Exelon's cost structure and financing costs, putting pressure on net margins and earnings.
  
• Exelon's future load growth projections are reliant on the successful execution of major projects and anticipated customer demand; failure to achieve projected load increases due to market or operational challenges could impact projected revenue growth.
  
• Dependence on regulatory and legislative support for large-scale transmission and clean energy investments presents a risk if political or regulatory environments shift, potentially leading to decreased projected capital expenditures and future earnings.

Valuation

• The analysts have a consensus price target of $44.221 for Exelon 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 2028, revenues will be $25.3 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 6.2%.
• Given the current share price of $44.42, the analyst price target of $44.22 is 0.4% 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.