Decisive Regulatory Engagements And Diverse Growth Avenues Propel Revenue And Strengthen Financial Health

Key Takeaways

• Regulatory engagements and successful rate adjustments signal strong revenue growth and a positive outlook on future earnings.
  
• A solid financial position, characterized by a high equity capitalization and significant liquidity, supports capital expenditures for system improvements.
  
• Regulatory challenges, rising O&M costs, dependency on key segments, and economic risks may constrain Atmos Energy's revenue growth and earnings stability.

Catalysts

Engages in the regulated natural gas distribution, and pipeline and storage businesses in the United States.

• Regulatory outcomes reflecting increased safety and reliable spending have increased operating income by $238 million, indicating strong revenue growth from regulatory engagement.
  
• Residential customer growth and rising industrial load contributed an additional $18 million to operating income, signaling potential for further revenue increases tied to expanding customer base and industrial demand.
  
• Elevated spreads between the Waha header and delivery points in the Atmos Energy's Pipeline and Storage segment are expected to remain elevated through the end of the fiscal year, suggesting short-term revenue boosts from favorable gas price differentials.
  
• The implementation of $213 million in annualized regulatory outcomes, including rate filings in Texas, Louisiana, and Tennessee, indicates expectations for continued revenue growth driven by successful rate adjustments.
  
• A strong equity capitalization of 61% and approximately $4.3 billion of liquidity, along with a manageable and strategically planned debt profile, points toward a robust financial position that supports ongoing and future capital expenditures aimed at improving system safety and reliability, potentially leading to long-term earnings growth.

Assumptions

• Analysts are assuming Atmos Energy's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.1% today to 24.9% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $8.08) by about November 2027, up from $1.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2027 earnings, down from 20.9x today. This future PE is greater than the current PE for the US Gas Utilities industry at 17.1x.
• Analysts expect the number of shares outstanding to grow by 3.26% 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

• Regulatory mechanisms might not approve future rate increases or might impose stricter requirements, potentially constraining revenue growth and affecting net margins.
  
• Persistent increases in operation and maintenance (O&M) costs, such as employment-related expenses and insurance premiums, if not adequately controlled or offset by regulatory recovery, could pressure earnings.
  
• Dependency on performance of the Pipeline and Storage segment, where unexpected maintenance or operational issues in pipelines (e.g., in the Permian) could disrupt throughput and affect revenue.
  
• The reliance on customer growth and industrial load in the Distribution segment for operating income increase faces risks from economic downturns or reduced energy demand, which could negatively impact revenue.
  
• Uncertainty around APT spread dynamics and the impact of new projects (e.g., Matterhorn in-service) could lead to volatility in earnings from the Pipeline and Storage segment.

Valuation

• The analysts have a consensus price target of $142.25 for Atmos 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 $156.0, and the most bearish reporting a price target of just $115.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.5 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 5.8%.
• Given the current share price of $137.98, the analyst's price target of $142.25 is 3.0% 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.