Acquisition Of Energy West Montana And Cut Bank Gas Assets Will Close Capacity Gaps And Attract New Customers

Key Takeaways

• Planned acquisitions and capital investment strategies aim to close capacity gaps and boost revenue with new large load customers and rate base growth.
  
• Initiatives in regulatory performance, new opportunities, and enhanced financial strategies focus on increasing margins, investor returns, and future earnings growth.
  
• Regulatory and weather-related challenges, alongside rising costs and investment needs, could strain NorthWestern Energy Group's financial performance and earnings growth.

Catalysts

Provides electricity and natural gas to residential, commercial, and various industrial customers.

• NorthWestern Energy's planned acquisition of Energy West Montana and Cut Bank Gas assets, along with incremental Colstrip ownership, could close capacity gaps and attract new large load customers, boosting potential revenue growth.
  
• The announcement of a $2.74 billion 5-year capital plan, representing an 11% increase over the prior plan, is expected to drive earnings growth and annualized rate base growth of 4% to 6%, impacting future earnings positively.
  
• The company's strong focus on regulatory and operational performance, including rate reviews and wildfire mitigation plans, aims to ensure cost recovery and provide reliable service, potentially improving net margins.
  
• NorthWestern Energy's commitment to pursuing new opportunities like data centers and regional transmission expansion provides potential for future incremental revenue and EPS growth beyond the expected 4% to 6% range.
  
• Efforts to enhance financial standing, including the increase of the quarterly dividend and self-funding of capital plans, are likely to improve investor returns and sentiment, contributing to future EPS growth.

NorthWestern Energy Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NorthWestern Energy Group's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.8% today to 14.0% in 3 years time.
• Analysts expect earnings to reach $246.7 million (and earnings per share of $4.03) by about March 2028, up from $224.1 million 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, up from 15.5x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 0.07% 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.

NorthWestern Energy Group Future Earnings Per Share Growth

Risks

• The regulatory environment in Montana, with a lack of interim rate support, could create challenges in recovering costs and earning authorized returns, impacting net margins and earnings.
  
• Weather-related uncertainties, such as the impacts of mild weather reducing expected earnings in Q4, pose a risk to revenue and overall financial performance.
  
• Increased operating costs, depreciation, and interest expenses in the face of historic test year regulatory frameworks can lead to reduced profitability and pressure earnings.
  
• The potential need for significant capital investments in infrastructure, like new transmission and generation assets, may stress financial resources and require financing, potentially impacting earnings.
  
• Data centers and large load opportunities, while beneficial in the long term, bring uncertainties in execution and regulatory approval, potentially impacting short-term revenue and earnings growth rates.

Valuation

• The analysts have a consensus price target of $59.312 for NorthWestern Energy Group 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 $66.0, and the most bearish reporting a price target of just $52.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $246.7 million, 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 $56.49, the analyst price target of $59.31 is 4.8% 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.