Future Water Infrastructure Investments Will Improve Reliability In Texas And Expand Capacity

Key Takeaways

• Strategic infrastructure investments and acquisitions are poised to enhance service reliability and drive revenue growth by addressing aging infrastructure and expanding capacity.
  
• Regulatory advances and rate approvals in key regions support stable revenue by maintaining favorable rates and cost recovery for compliance costs.
  
• Increased capital expenditures for infrastructure and PFAS compliance, along with regulatory and environmental challenges, could strain finances and impact profit margins.

Catalysts

Through its subsidiaries, provides water utility and other related services in the United States.

• SJW Group's significant increase in their five-year capital plan from $1.6 billion to $2 billion, with a focus on infrastructure investments like pipeline replacements and water treatment facilities, is expected to drive revenue growth by addressing aging infrastructure and improving system reliability.
  
• The successful approval of rate increases in key regions such as California and Connecticut, along with deferred cost of capital filings, supports stable or growing future revenue streams by maintaining favorable rates of return.
  
• The acquisition of KT Water Resources and the project to bring 6,000 acre-feet of additional water supply online in Texas by 2026 could enhance revenue and earnings in the region by improving service reliability and expanding capacity.
  
• Strategic operational investments in areas like advanced leak detection and system efficiency improvements are likely to result in cost savings and improved net margins, particularly by reducing non-revenue water in their service areas.
  
• Potential regulatory advancements, like the Water Quality and Treatment Adjustment mechanism in Connecticut, may provide quicker cost recovery for PFAS compliance costs and other infrastructure investments, supporting earnings stability and growth.

SJW Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SJW Group's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 19.2% in 3 years time.
• Analysts expect earnings to reach $158.0 million (and earnings per share of $3.31) by about March 2028, up from $94.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $185 million in earnings, and the most bearish expecting $131 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 20.0x today. This future PE is lower than the current PE for the US Water Utilities industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 4.46% 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.

SJW Group Future Earnings Per Share Growth

Risks

• The significant increase in capital expenditures, needed for infrastructure upgrades and PFAS compliance, could pressure cash flow and strain financial resources, potentially impacting net margins and earnings.
  
• The challenges of managing drought conditions, particularly in Texas, may require substantial investments to improve water system resilience, which could affect operating expenses and consequently net income.
  
• SJW Group's 2025 equity issuance plans could lead to dilution of existing shares, impacting earnings per share and potentially offsetting revenue gains.
  
• The elevated water production and operating expenses, driven by higher wholesaler rates and customer usage, might compress profit margins and challenge achieving projected earnings growth.
  
• Regulatory risks, such as rate case approvals and changes in environmental standards, could lead to uncertainties in revenue recovery and impact long-term financial stability.

Valuation

• The analysts have a consensus price target of $60.2 for SJW Group 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 $823.0 million, earnings will come to $158.0 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $55.8, the analyst price target of $60.2 is 7.3% 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.