Data Center Investments And Colorado Clean Energy Plan Will Strengthen Future Operations

Key Takeaways

• Strategic capital investments in data centers and clean energy are key to boosting EPS and supporting revenue growth in alignment with demand trends.
  
• Effective cost management and regulatory approvals are essential for maintaining stable net margins and offsetting operational challenges.
  
• Heavy reliance on data center growth and capital projects could risk revenue, earnings, and increase costs amid rising insurance, interest, and regulatory uncertainties.

Catalysts

Through its subsidiaries, operates as an electric and natural gas utility company in the United States.

• Black Hills Corporation's growth strategy includes a significant capital investment plan of $4.7 billion from 2025 to 2029, with a focus on data center demand. This initiative is expected to contribute significantly to EPS growth, with data centers anticipated to account for more than 10% of total EPS by 2029. This will likely improve revenue and earnings.
  
• The company is advancing its Clean Energy Plan for Colorado Electric, which involves adding 350 megawatts of renewable resources between 2026 and 2028. This aligns with the increasing demand for clean energy and should improve revenues and potentially reduce costs associated with carbon emissions.
  
• Black Hills Corporation plans to invest in new electric generation for South Dakota Electric, including a 99-megawatt dispatchable generation project called Lange 2, targeted for completion in the second half of 2026. Such investments are expected to support revenue growth and enhance net margins through improved efficiency and reliability.
  
• Operational costs are being managed carefully, with 2024 seeing less than a 1% increase in O&M expenditures, which helped offset other challenges. Continued expense management will contribute positively to net margins and earnings.
  
• The company's regulatory progress, including rate reviews and approvals for Arkansas Gas and Iowa Gas, ensures that future investments are recovered and inflationary impacts on cost to serve are managed. This will support stable revenue growth and maintain net margins.

Black Hills Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Black Hills's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.8% today to 15.5% in 3 years time.
• Analysts expect earnings to reach $361.0 million (and earnings per share of $4.58) by about March 2028, up from $273.1 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 17.3x on those 2028 earnings, up from 15.9x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 3.89% 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.

Black Hills Future Earnings Per Share Growth

Risks

• The company faces risks from its reliance on projected data center growth, which, if not realized as expected, could impact future revenue and earnings growth.
  
• Potential delays in large capital projects, such as the Ready Wyoming transmission project and the Colorado Clean Energy Plan, could result in higher capital costs and affect earnings projections.
  
• Unforeseen challenges such as mild weather and unplanned outages, which occurred in 2024, can result in lower than expected revenues and margin growth.
  
• Rising insurance and interest costs continue to pose a risk by increasing operating and financing expenses, potentially impacting net margins and earnings.
  
• Regulatory outcomes and rate reviews dependent on approval can create uncertainty, where unfavorable results would affect projected revenue streams and cost recoveries.

Valuation

• The analysts have a consensus price target of $65.0 for Black Hills 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 $76.0, and the most bearish reporting a price target of just $59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $361.0 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 $60.49, the analyst price target of $65.0 is 6.9% 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.