Electric Sector Modernization Plan And Clean Energy Initiatives Will Strengthen Future Stability

Key Takeaways

• Eversource's shift to a regulated utility and infrastructure investments suggests stable growth and likely improvement in future earnings.
  
• Strategic clean energy advancements and Electric Sector Modernization Plan approval could boost future revenues and promote long-term EPS growth.
  
• Exiting offshore wind and facing financial and regulatory challenges may limit growth, strain margins, and affect earnings stability and investment efficiency.

Catalysts

A public utility holding company, engages in the energy delivery business.

• Eversource's exit from offshore wind development and focus on being a pure-play regulated utility provides reliable growth opportunities through regulated investments, likely benefiting future earnings stability.
  
• Eversource's robust capital plan through 2028, with nearly $24 billion expected investment in electric, gas, and water infrastructure, along with significant investments in transmission, points to anticipated revenue growth.
  
• Strengthening the balance sheet through improving the FFO to debt ratio, equity issuances, and cost recovery initiatives could lead to enhanced net margins and financial flexibility.
  
• Strategic advancements in clean energy initiatives, such as the development of the Huntsbrook Offshore Wind Hub and expansion of battery energy storage in Massachusetts, suggest potential for increased future revenues and regulatory incentives.
  
• Approval of the Electric Sector Modernization Plan in Massachusetts opens up significant transmission investment opportunities, potentially boosting long-term EPS growth between 5% to 7% through increased electrification capacity.

Eversource Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eversource Energy's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.7% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $5.22) by about December 2027, up from $-549.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2027 earnings, up from -38.2x 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 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Eversource Energy Future Earnings Per Share Growth

Risks

• Exiting the offshore wind development business could limit future revenue diversification and potential growth opportunities in this rapidly expanding energy sector, potentially impacting future revenue streams.
  
• The $524 million net loss incurred from the offshore wind divestiture highlights financial execution risks, which may affect net margins and overall earnings if similar risks persist in future transactions.
  
• A challenging regulatory environment in Connecticut, particularly regarding Advanced Metering Infrastructure (AMI) investments, could lead to delays in cost recovery and uncertainty in realizing the full potential of planned infrastructure investments, impacting long-term earnings stability.
  
• Ongoing high interest expenses due to timing and volume of debt issuances might pressure net margins and could limit financial flexibility, thus influencing earnings growth targets.
  
• The potential for unforeseen construction costs and delays, as evidenced by the issues with offshore wind investments and the large-scale Cambridge substation project, poses a risk to budget adherence, which could negatively affect capital expenditure efficiency and return on investment.

Valuation

• The analysts have a consensus price target of $70.96 for Eversource Energy 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 $87.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.2 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $57.28, the analyst's price target of $70.96 is 19.3% 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.