Capital Reinvestment And Infrastructure Upgrades Will Drive Future Sustainability

Key Takeaways

• Eversource's strategic sales and infrastructure investments aim to improve financial flexibility, increase revenue, and enhance system reliability and customer satisfaction.
  
• Regulatory support and strategic partnerships bolster earnings stability and energy diversification, positioning Eversource at the forefront of sustainable energy innovation.
  
• Eversource Energy's strategy shift and potential regulatory hurdles may impair revenue streams, increase risks, and affect shareholder returns and profitability.

Catalysts

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

• Eversource's strategic sale of Aquarion Water at a high multiple is expected to free up capital for reinvestment in core regulated utilities, potentially improving net margins by reducing debt and enhancing financial flexibility.
  
• The company's focus on infrastructure investments, particularly with a new five-year capital plan increasing by $2.1 billion, aims to modernize transmission and distribution networks, likely boosting revenue through improved system reliability and customer satisfaction.
  
• Eversource's commitment to advancing energy diversification through projects like the Greater Cambridge Energy initiative and the construction of a groundbreaking underground substation is anticipated to support earnings growth by positioning the company at the forefront of sustainable energy innovation.
  
• Continued regulatory support and rate increases for electric and gas distribution in Massachusetts and New Hampshire are set to enhance earnings stability and growth by allowing timely cost recovery and facilitating infrastructure upgrades.
  
• Eversource is leveraging strategic partnerships and policy advancement to increase energy supply diversity, which could lower customer rates over time and improve revenue by accommodating increased load demand and supporting New England's clean energy transition.

Eversource Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Eversource Energy compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Eversource Energy's revenue will grow by 10.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.8% today to 12.9% in 3 years time.
• The bullish analysts expect earnings to reach $2.1 billion (and earnings per share of $5.5) by about April 2028, up from $811.7 million today. 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 18.9x on those 2028 earnings, down from 26.2x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 4.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.31%, as per the Simply Wall St company report.

Eversource Energy Future Earnings Per Share Growth

Risks

• Eversource Energy's exit from the offshore wind business and the pending sale of Aquarion Water might reflect potential difficulties in these areas, impacting future revenue streams and earnings.
  
• The reliance on regulatory approvals and capital investment plans in Massachusetts and Connecticut presents risks; delays or unfavorable outcomes could adversely affect anticipated revenue growth and capital expenditures.
  
• Higher operational expenditures, interest expenses, and depreciation could erode net margins, particularly when combined with the challenges of maintaining high customer satisfaction and regulatory compliance.
  
• The planned issuance of substantial equity may dilute current shareholders' value, potentially leading to lower earnings per share and reduced shareholder returns.
  
• Exposure to changes in federal and state regulations regarding energy distribution and utility rates could introduce uncertainties in revenue predictability and profitability.

Valuation

• The assumed bullish price target for Eversource Energy is $78.36, which represents one standard deviation above the consensus price target of $69.21. This valuation is based on what can be assumed as the expectations of Eversource Energy'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 $85.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $16.0 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 6.3%.
• Given the current share price of $57.98, the bullish analyst price target of $78.36 is 26.0% 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.