Future Investments And Rate Adjustments Will Shape Revenue Outlook, Yet Margin Pressures And Regulatory Delays Pose Risks

Key Takeaways

• New rate structures and infrastructure investments are anticipated to boost future revenue and rate base growth through enhanced capacity and compliance.
  
• Expansion into growing markets like Texas is set to drive revenue growth with increased customer base and service integration.
  
• Financial stability is threatened by delayed rate cases, lower water usage due to weather, increased costs, and the need for substantial capital investment approvals.

Catalysts

Through its subsidiaries, provides water utility and other related services in California, Washington, New Mexico, Hawaii, and Texas.

• Implementation of a new rate structure authorized in their General Rate Case (GRC) and increased infrastructure investments, setting the stage for improved future revenue and rate base growth.
  
• Significant planned capital expenditures, including an estimated $226 million for PFAS projects through 2027, which are expected to bolster revenue by enhancing operational capacity and regulatory compliance.
  
• The proactive push for rate adjustments in other states is expected to stabilize and potentially increase net margins by aligning rates with investments more quickly.
  
• Efforts in wildfire hardening, climate change adaptation, and infrastructure improvements bolster long-term revenue stability through improved service and risk mitigation.
  
• Continued expansion into fast-growing markets like Texas is poised to drive revenue growth with substantial customer base increases from greenfield developments and expected water service integration.

California Water Service Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming California Water Service Group's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.4% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $181.5 million (and earnings per share of $2.86) by about March 2028, down from $190.8 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 24.4x on those 2028 earnings, up from 14.6x today. This future PE is greater than the current PE for the US Water Utilities industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 3.0% 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.

California Water Service Group Future Earnings Per Share Growth

Risks

• The California Water Service Group experienced financial challenges in early 2024 due to delayed rate case decisions in California, which could impact revenue stability if similar delays occur with future rate cases.
  
• There is a risk from lower water usage due to cooler and wetter weather, which led to decreased unbilled revenue in late 2024; such weather patterns could persist and negatively impact future revenues.
  
• The company's increased operating expenses due to higher water production costs from wholesale rates and consumption growth may pressure net margins if not fully offset by rate adjustments.
  
• The financial results for 2024 included significant retroactive benefits ($64 million net income) from a delayed rate case, inflating earnings and potentially creating a misleadingly positive financial outlook.
  
• With substantial planned capital investments required for PFAS projects and infrastructure improvements, failure to secure necessary approvals or delays in receiving them could affect cash flow and financing costs.

Valuation

• The analysts have a consensus price target of $56.75 for California Water Service Group 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 $1.1 billion, earnings will come to $181.5 million, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $46.88, the analyst price target of $56.75 is 17.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.