Calculated Regulatory Moves And Renewable Investments Power Growth Trajectory

Key Takeaways

• Strategic rate cases and investments in infrastructure and renewables are set to bolster Avista's revenue growth and net margins.
  
• Participation in projects like North Plains Connector is expected to enhance capacity, reliability, and future revenue streams.
  
• Avista's high supply costs, regulatory challenges, and reliance on external financing could negatively impact earnings and potentially dilute shareholder value.

Catalysts

Operates as an electric and natural gas utility company.

• Avista's regulatory strategy, including general rate cases in Washington and Oregon and a forthcoming case in Idaho, is expected to support future revenue growth and improve net margins by aligning rates more closely with costs.
  
• The anticipated participation in projects like the North Plains Connector transmission line is poised to enhance Avista's capacity, reliability, and integration with additional markets, potentially boosting future revenue streams.
  
• Investing $1.7 billion over the next three years in utility infrastructure is expected to accommodate customer growth and maintain system reliability, potentially enhancing both revenues and earnings.
  
• The ongoing shift towards renewable and low-emission power sources, including new projects like Clearwater Wind, is likely to align with clean energy standards and support long-term revenue stability and growth.
  
• Efforts to modify the Energy Recovery Mechanism (ERM) could mitigate power supply cost volatility, potentially leading to improved net margins and earnings stability.

Avista Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avista's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 10.9% in 3 years time.
• Analysts expect earnings to reach $231.2 million (and earnings per share of $2.82) by about November 2027, up from $197.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2027 earnings, up from 15.1x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 1.2% 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.

Avista Future Earnings Per Share Growth

Risks

• Avista faces headwinds with higher-than-expected power supply costs, which could negatively impact net margins and earnings.
  
• The expected improvement in private equity markets has not materialized, resulting in a net loss expectation for other business segments, which could lower overall earnings.
  
• Avista's regulatory strategy is critical, with ongoing rate cases potentially affecting revenue stability if outcomes are not favorable.
  
• Volatility in the clean tech market and delays in M&A and IPO activity could impact investment returns and earnings.
  
• Despite substantial capital expenditure plans, the reliance on external financing and common stock issuance could dilute shareholder value and affect net earnings.

Valuation

• The analysts have a consensus price target of $39.25 for Avista 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 $49.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $231.2 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $37.47, the analyst's price target of $39.25 is 4.5% 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.