Undergrounding And Wildfire Investments Will Secure Resilient Electric Service

Key Takeaways

• Investments in infrastructure and wildfire mitigation strategies aim to enhance reliability, reduce liabilities, and support long-term revenue growth.
  
• Future regulatory approvals and capital projects are expected to stabilize financial obligations and boost earnings potential through improved cash flow management.
  
• Potential liabilities from the Eaton fire, regulatory changes, and wildfire mitigation efforts could financially strain Edison International, affecting earnings, margins, and future growth.

Catalysts

Through its subsidiaries, engages in the generation and distribution of electric power.

• Edison International is expecting a decision on SCE's 2025 General Rate Case, which will support a commitment to reliable and resilient electric service, potentially increasing future revenue through approved rate adjustments and sustained infrastructure investments.
  
• The company plans to underground over 150 circuit miles in areas affected by wildfires, a move that could enhance system reliability and reduce future wildfire-related liabilities, potentially improving net margins by reducing risk-related costs.
  
• SCE's capital plan includes significant investments in wildfire mitigation, with $1.4 billion of annual spending aimed at hardening infrastructure and implementing advanced wildfire management strategies, likely to support long-term revenue growth through regulatory recovery.
  
• Future cost recovery from approved settlements and regulatory changes, such as the TKM cost recovery settlement and potential future securitization, could positively impact earnings by stabilizing financial obligations and improving cash flow management.
  
• Edison International anticipates capital investments, like the $1.1 billion next-gen ERP application and FERC transmission projects, which are expected to provide substantial customer benefits and a high rate base growth opportunity, leading to enhanced future earnings.

Edison International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Edison International's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.8% today to 12.0% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $5.96) by about May 2028, down from $2.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Edison International Future Earnings Per Share Growth

Risks

• The ongoing investigation into the Eaton fire and potential liabilities could result in material losses for Edison International, increasing uncertainty around their financial exposure and impacting earnings.
  
• SCE's involvement in the Eaton fire has not been ruled out, which may lead to additional liabilities and legal costs that could strain the company's financial resources, potentially affecting net margins.
  
• Any necessary reimbursements to the $21 billion wildfire fund, if SCE's equipment is deemed responsible for the Eaton fire and found imprudent, could impose further financial burdens, impacting net margins and earnings stability.
  
• There is uncertainty regarding the timing and outcome of new legislation that could impact the regulatory framework surrounding wildfires; delays or unfavorable changes might hinder future revenue growth or increase operational costs.
  
• Although wildfire mitigation plans are advancing, ongoing regulatory processes and capital requirements to address fire risks could increase operational complications and investment uncertainties, impacting future revenue growth and financial planning.

Valuation

• The analysts have a consensus price target of $69.877 for Edison International 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 $86.0, and the most bearish reporting a price target of just $50.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.2 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of $54.83, the analyst price target of $69.88 is 21.5% 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.