Renewable Energy Investments Will Strengthen Future Business Prospects

Key Takeaways

• Strategic investments in renewable energy and storage aim to boost future earnings and improve revenue streams, impacting net margins positively.
  
• Securing long-term agreements and extending contracts enhances revenue visibility and supports meeting financial targets, driving long-term growth.
  
• Dependency on growth investments, volatile financial conditions, policy risks, and execution challenges could strain cash flow and negatively impact margins and profitability.

Catalysts

Operates in the clean energy generation assets business in the United States.

• Clearway Energy is making significant growth investments, including $450 million in 2024, in renewable energy and energy storage, which are expected to contribute to future earnings growth and improve revenue streams.
  
• The company has secured long-term agreements with major customers for future projects, such as Phase 1 of the Honeycomb battery projects and repowering projects like Mount Storm, expected to enhance CAFD (Cash Available for Distribution), thereby impacting future net margins.
  
• Clearway's ongoing efforts in extending revenue contracts, like the PPA extension at Wildorado, provide increased revenue visibility without deploying incremental capital, which should aid in sustaining or improving net margins.
  
• The company's strategic focus on contracting opportunities in flexible generation and its current fully contracted status for the California fleet through 2026 is expected to support meeting or exceeding future financial targets while impacting the bottom line effectively.
  
• Clearway Group's late-stage pipeline of over 5 gigawatts of projects aligns with increasing electricity demand from industrial and digital sectors, providing pathways for new revenue streams and supporting growth in net earnings over the long term.

Clearway Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Clearway Energy's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $184.7 million (and earnings per share of $1.23) by about April 2028, up from $88.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $275.5 million in earnings, and the most bearish expecting $110.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 47.5x on those 2028 earnings, up from 33.3x today. This future PE is greater than the current PE for the US Renewable Energy industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Clearway Energy Future Earnings Per Share Growth

Risks

• The dependency on growth investments, such as the $450 million committed for 2024 and the need to fund projects like Phase 1 of the Honeycomb battery or repowering Mount Storm, could strain cash flow or lead to debt increases, impacting net margins and earnings.
  
• The current cost of capital environment, along with implications for refinancing future debt maturities, presents a risk to maintaining favorable margins and profitability as these financial conditions continue to be volatile.
  
• Potential policy and tariff changes, particularly those affecting the supply chain with materials like steel and aluminum, could increase costs for development and capital projects, negatively impacting net margins and earnings.
  
• There is execution risk associated with maintaining growth through M&A and internal development while achieving CAFD yield targets, which could result in underperformance in revenue or earnings if hurdles are not met.
  
• Recontracting opportunities, such as the PPA extensions or new RA contracts, depend on securing favorable terms in a dynamic energy market. The failure to do so could lead to revenue shortfalls and pressure on margins.

Valuation

• The analysts have a consensus price target of $34.364 for Clearway Energy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $184.7 million, and it would be trading on a PE ratio of 47.5x, assuming you use a discount rate of 7.8%.
• Given the current share price of $24.95, the analyst price target of $34.36 is 27.4% higher.
• 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.