System Modernization Will Strengthen Natural Gas Infrastructure And Expand Customer Base In Texas

Key Takeaways

• Extensive capital investment in system modernization and expansion is poised to boost growth and revenue through increased demand and customer acquisition.
  
• Strategic financing and consistent rate filings should support revenue stability, operational efficiency, and steady earnings growth while maintaining a strong balance sheet.
  
• Atmos Energy's substantial capital investment and reliance on favorable conditions and regulations may strain finances and impact future earnings and margin growth.

Catalysts

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

• Atmos Energy's commitment to a $24 billion capital investment in the next 5 years is expected to support continued modernization and expansion of the natural gas distribution, transmission, and storage systems, which should boost revenue and rate base growth.
  
• The company anticipates adding significant numbers of new residential, commercial, and industrial customers, particularly in Texas, which is likely to drive revenue growth due to increased demand for natural gas.
  
• Atmos Energy's focus on safety and reliability through significant capital spending, including infrastructure improvements, is set to enhance operational efficiency, benefiting net margins over time.
  
• The execution of approximately 20 rate filings per year is expected to support revenue stability and growth through timely cost recovery mechanisms.
  
• The company's financing strategy, which includes approximately $15 billion of incremental long-term financing, aims to support growth while maintaining a strong balance sheet, potentially leading to steady earnings growth.

Atmos Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atmos Energy's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.0% today to 25.4% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $8.31) by about December 2027, up from $1.0 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 20.9x on those 2027 earnings, down from 21.1x today. This future PE is greater than the current PE for the US Gas Utilities industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 4.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Atmos Energy Future Earnings Per Share Growth

Risks

• Atmos Energy's substantial capital investment plan of $24 billion over five years, primarily for system modernization, could strain financial resources and potentially impact net margins due to increased debt and equity financing needs.
  
• The company's earnings per share guidance growth rate of 6% to 8% lags behind the anticipated 13% to 15% annual rate base growth, which could indicate potential inefficiencies or higher costs impacting earnings.
  
• Increased customer and infrastructure growth leading to higher O&M costs, including a 4% annual inflation rate, could pressure operating margins and offset revenue gains from new customers.
  
• The company's extensive reliance on regulatory filings for cost recovery assumes no changes in regulatory mechanisms or allowed returns, presenting a risk to future revenue if regulatory conditions become unfavorable.
  
• A potential normalization of favorable market conditions, such as Waha pricing spreads, may reduce the earnings boost experienced in fiscal '24, impacting operating income growth going forward.

Valuation

• The analysts have a consensus price target of $146.41 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 $165.0, 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 $5.8 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 5.9%.
• Given the current share price of $141.38, the analyst's price target of $146.41 is 3.4% 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.