SCE's Clean Energy Ambitions And Regulatory Wins Drive Revenue Growth And Stability

Key Takeaways

• SCE's regulatory settlements and wildfire risk mitigation efforts enhance operational resilience and could stabilize future earnings.
  
• Plans for clean energy transition and capital investments may drive revenue growth, supported by improved cash flow from regulatory recoveries.
  
• Regulatory and wildfire-related uncertainties, along with interest expenses and clean energy investment costs, pose significant risks to Edison International's earnings and profitability.

Catalysts

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

• Edison International's Southern California Edison (SCE) is making significant progress with regulatory matters, including the settlement of legacy wildfire issues and upcoming regulatory decisions, which could improve future revenue and earnings stability.
  
• The company's focused efforts on wildfire risk mitigation and grid hardening, such as the deployment of covered conductors, improve operational resilience and potentially reduce future operational costs, thus positively impacting net margins and financial stability.
  
• SCE's plan to transition to clean energy and reach net-zero greenhouse gas emissions by 2045 is expected to be a growth driver, leading to capital investments and a reduction in operational emissions, impacting future revenue growth from new compliant energy projects.
  
• The projection for future cash flow improvements from regulatory recoveries, such as the $3 billion incremental cash flow expected, strengthens the balance sheet and supports capital investment strategies, which could enhance earnings growth.
  
• Upcoming capital investments and regulatory filings including advanced metering infrastructure and FERC transmission projects, totaling over $4 billion, suggest future revenue expansion opportunities and improved grid capabilities to support earnings growth.

Edison International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Edison International's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.6% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $6.2) by about November 2027, up from $1.3 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 17.2x on those 2027 earnings, down from 24.1x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.8x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

Edison International Future Earnings Per Share Growth

Risks

• Regulatory risks, such as the recent change in the cost of capital mechanism and potential adverse outcomes in regulatory proceedings, could negatively impact authorized returns and overall earnings.
  
• With the proceedings for Woolsey wildfire cost recovery still in the early stages, there is uncertainty around the potential outcomes which are historically variable and could pose a risk to future earnings stability.
  
• Increased interest expenses related to debt for wildfire claims payments present a risk of constraining net margins, potentially affecting overall profitability.
  
• Despite confidence in managing operating expenses, there remains uncertainty in factors such as interest rate volatility, which could impact the ability to achieve projected cost savings and affect financial performance.
  
• Although Edison International is pursuing a long-term strategy to meet net-zero carbon emissions by 2045, any delays or cost overruns in clean energy investments, and infrastructure upgrades could lead to increased capital expenditures, pressuring net margins and earnings growth trajectories.

Valuation

• The analysts have a consensus price target of $89.8 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 $100.0, and the most bearish reporting a price target of just $73.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $19.6 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of $82.18, the analyst's price target of $89.8 is 8.5% 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.