Urbanization And Electrification Will Shape Grid Modernization Despite Challenges

Key Takeaways

• Edison's strategic regulatory engagement and adoption of advanced technologies could drive higher earnings growth and improved margins beyond current market expectations.
  
• Surging electrification, population growth, and proven cost leadership position SCE for accelerated revenue expansion and regulatory support relative to peers.
  
• Wildfire risks, regulatory uncertainty, climate impacts, distributed energy adoption, and cost pressures threaten Edison International's earnings stability, revenue growth, and financial resilience.

Catalysts

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

• Analyst consensus is overlooking the likelihood that-as Edison more aggressively pursues revisions to the General Rate Case proposal and leverages its strong relationship with California policymakers-the final decision could surpass base expectations, unlocking even greater authorized revenue and accelerated capital recovery, which would drive substantially higher long-term earnings growth.
  
• While analysts broadly view SCE's grid hardening and wildfire mitigation as margin stabilizers, the accelerated adoption of advanced AI
• and sensor-driven technologies like AWARE is likely to sharply reduce risk-related costs beyond current projections, potentially driving an outsized improvement in net margins over time.
  
• Edison International stands to benefit more than peers from California's surging electrification of transportation, industrial processes, and data center expansion; this structural demand growth will increase throughput and non-fuel revenues at a much faster pace than factored into most estimates.
  
• SCE's track record of operating with the lowest system average rates among major California utilities, coupled with ongoing digitalization and cost management, positions it to win regulatory support for expanded rate base initiatives that will compound earnings growth well into the next decade.
  
• Ongoing urbanization and population migration trends in Southern California mean SCE's asset base and customer pool will continue to grow even in the face of economic volatility, providing an underappreciated cushion for stable cash flows and long-term revenue expansion.

Edison International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Edison International compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Edison International's revenue will grow by 8.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 15.0% today to 11.4% in 3 years time.
• The bullish analysts expect earnings to remain at the same level they are now, that being $2.6 billion (with an earnings per share of $6.43). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

Edison International Future Earnings Per Share Growth

Risks

• Ongoing wildfire risk in Southern California continues to expose Edison International to sizable legal liabilities, highlighted by the Eaton Fire and historical precedent for multi-billion-dollar settlements, increasing uncertainty around net margins and future earnings.
  
• Legislative and regulatory changes in California, such as potential expansion or changes to AB 1054, may require upfront shareholder or utility equity contributions or alter risk-sharing models, which could raise cost of capital and negatively affect future earnings and net income.
  
• Intensifying climate change is driving higher frequency and severity of wildfires, floods, and heatwaves, directly increasing Edison International's operational, insurance, and infrastructure costs, leading to persistent pressure on net margins.
  
• The accelerating adoption of distributed energy resources-such as rooftop solar, battery storage, and microgrids-threatens to erode Edison International's traditional electricity sales and long-term revenue, as increasing numbers of customers generate or store their own power.
  
• Persistent rate pressure due to the need for significant capital expenditures for wildfire mitigation and grid modernization, combined with customer affordability challenges and political pushback, could constrain Edison International's pricing power and impede long-term revenue growth.

Valuation

• The assumed bullish price target for Edison International is $83.99, which represents two standard deviations above the consensus price target of $66.61. This valuation is based on what can be assumed as the expectations of Edison International's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $22.5 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $55.28, the bullish analyst price target of $83.99 is 34.2% 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.