Economic Growth And Michigan's Clean Energy Law Will Drive Future Renewable Investments

Key Takeaways

• Passage of Michigan's clean energy law and supportive regulation enhance investment in renewables, boosting revenue and earnings with improved power agreements.
  
• Economic growth and Electric Reliability Roadmap drive energy demand and efficiency, resulting in potential revenue expansion and improved net margins.
  
• Regulatory challenges, weather reliance, and storm risks may impact CMS Energy's costs, earnings growth, and financial stability, while financing needs could strain liquidity.

Catalysts

Operates as an energy company primarily in Michigan.

• The passage of Michigan's clean energy law acts as a catalyst for future investment in renewable energy, allowing CMS Energy to replace outdated power agreements with new assets, which could lead to increased revenue and expanded earnings opportunities due to a financial compensation mechanism of approximately 9% on power purchase agreements.
  
• The $7 billion Electric Reliability Roadmap aims to enhance operational efficiency and customer service reliability, potentially resulting in improved net margins by reducing restoration costs and enhancing grid resiliency, which lowers operating expenses in the long term.
  
• Significant economic development in Michigan, with increased manufacturing activity, is expected to drive energy demand and sales growth. This manufacturing renaissance, facilitated by new investments and incentives, positions CMS Energy for higher revenue growth prospects as load requirements increase.
  
• Enhanced capacity from contracts for 700 megawatts within the last 24 months and additional 6 gigawatts in the pipeline supports CMS Energy's opportunity to meet new demand and suggests potential for revenue growth linked to improved energy supply contracts and increased sales volumes.
  
• The favorable regulatory outlook, including constructive outcomes in utility rate cases and a supportive public service commission, underpins continued earnings growth and potentially provides a stable platform for consistent share price appreciation as investments in infrastructure and clean energy are recovered.

CMS Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CMS Energy's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.9% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $4.07) by about December 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 21.0x on those 2027 earnings, up from 19.3x today. This future PE is greater than the current PE for the US Integrated Utilities industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.75% 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.

CMS Energy Future Earnings Per Share Growth

Risks

• Regulatory changes or challenges could delay or impact CMS Energy's investments in clean energy and electric grid reliability, which would affect earnings growth and net margins.
  
• The reliance on favorable weather and lower service restoration expenses poses a risk if conditions change, potentially impacting operating costs and net margins.
  
• Increased frequency and severity of storms may cause unanticipated expenditures on system repairs and maintenance, affecting operational costs and net margins.
  
• Conservative assumptions built into future earnings like the reliance on tax-related benefits and non-utility performance may not materialize as expected, impacting net income.
  
• The need for significant financing to support CapEx and potential for regulatory disallowance could strain credit ratings and liquidity, impacting financial stability and earnings.

Valuation

• The analysts have a consensus price target of $71.95 for CMS 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 $79.0, and the most bearish reporting a price target of just $58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.8 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $67.04, the analyst's price target of $71.95 is 6.8% 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.