Wind Exit And Aquarion Sale Will Test And Spark Projects

Key Takeaways

• Exiting offshore wind may limit future revenue in a critical sector for regional energy diversification.
  
• Regulatory delays and equity issuance could impact earnings and shareholder value despite infrastructure investments.
  
• Eversource's strategic focus on core utilities, debt reduction, infrastructure upgrades, and regulatory partnerships positions it for improved financial performance and operational efficiency.

Catalysts

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

• Eversource Energy’s growth could be hindered by the decision to exit the offshore wind business, as this may limit future revenue opportunities in a sector that is strategically important for the region's energy diversification goals.
  
• The sale of the Aquarion Water business, despite providing short-term debt reduction benefits, results in the loss of a stable revenue and earnings stream, potentially impacting long-term revenue growth projections.
  
• Delays or challenges in regulatory approvals, particularly in Connecticut where Eversource seeks changes in regulations, could hinder planned rate increases and limit the company’s ability to recover costs, impacting future earnings.
  
• Increased investments in infrastructure projects, such as the ambitious $1.8 billion Greater Cambridge Energy project, may not fully realize the expected returns due to execution risks, potentially squeezing net margins if cost overruns or delays occur.
  
• The expected issuance of $1.2 billion in equity can lead to shareholder dilution, potentially reducing earnings per share growth despite the company’s infrastructure investments aimed at boosting revenue and maintaining resilience.

Eversource Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Eversource Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Eversource Energy's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.8% today to 13.9% in 3 years time.
• The bearish analysts expect earnings to reach $1.9 billion (and earnings per share of $4.61) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 26.0x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.2x.
• 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 demonstrated strong financial performance in 2024, with earnings per share increasing by 5.3% year-over-year, which indicates potential for growth in net earnings in the future.
  
• The company successfully strengthened its balance sheet through the sale of Aquarion Water, using proceeds to reduce debt and reinvest in its core electric and natural gas operations, likely improving its financial position and potentially enhancing net margins.
  
• Eversource's commitment to growing its regulated utilities, with a significant 10% increase in planned capital investment over the next five years, suggests a focus on expanding its revenue base through infrastructure improvements and diversification.
  
• The implementation of advanced technologies such as Automated Metering Infrastructure and major infrastructure projects like the Greater Cambridge Energy Project highlight potential future improvements in operational efficiency and customer service, positively impacting revenue.
  
• Eversource maintains strong collaboration and positive regulatory relationships, particularly with New England states, aiming to secure favorable outcomes for transmission and distribution investments, potentially supporting steady revenue and earnings growth.

Valuation

• The assumed bearish price target for Eversource Energy is $59.69, which represents one standard deviation below the consensus price target of $68.68. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $13.3 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $57.44, the bearish analyst price target of $59.69 is 3.8% higher. The relatively low difference between the current share price and the analyst bearish 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.