Energy Efficiency Programs And 1GW Solar Investments Will Strengthen Future Operations

Key Takeaways

• Energy efficiency programs and commercial solar investments are expected to enhance revenue and long-term earnings growth, improving net margins and operational efficiencies.
  
• Strategic expansions in storage, transportation, and infrastructure investments boost predictable earnings and provide a stable financial foundation.
  
• Regulatory approval dependencies, capital shifts to commercial solar, and broad earnings guidance introduce risks to revenue stability, financial outcomes, and investor confidence.

Catalysts

An energy services holding company, distributes natural gas.

• NJR's energy efficiency programs, especially through the SAVEGREEN initiative, are expected to boost future customer growth and expand energy efficiency investments, positively impacting revenue and long-term earnings growth.
  
• The commercial solar investment pipeline of over 1 gigawatt presents robust potential for revenue enhancement through stable, high availability solar projects, improving net margins due to economies of scale and operational efficiencies.
  
• Strategic focus on expanding storage and transportation services, including Leaf River's capacity recovery project and Adelphia Gateway's anticipated rate case outcomes, will likely result in increased fee-based revenue and predictable earnings.
  
• Settlement of New Jersey Natural Gas' base rate case ensures a revenue increase of $157 million, enhancing margins and providing a stable financial foundation for further infrastructure investments.
  
• The sale of the Sunlight Advantage residential solar portfolio strengthens NJR's balance sheet, allowing the redirection of capital into higher-return commercial solar projects and contributing to improved cash flow and earnings per share.

New Jersey Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Jersey Resources's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 16.7% in 3 years time.
• Analysts expect earnings to reach $352.2 million (and earnings per share of $3.5) by about December 2027, up from $289.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2027 earnings, up from 16.4x today. This future PE is lower than the current PE for the US Gas Utilities industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

New Jersey Resources Future Earnings Per Share Growth

Risks

• Dependence on regulatory approvals for projects and rate cases could constrain revenue growth if approvals are delayed or not granted, impacting revenue stability and expansion opportunities.
  
• The sale of the Sunlight Advantage residential solar portfolio might result in short-term dilution of earnings, affecting overall earnings trajectory despite the immediate financial gain.
  
• A shift in focus and capital allocation towards commercial solar projects and away from residential could encounter unforeseen market or operational challenges, potentially impacting revenues and investment returns.
  
• Planned capital expenditure programs, especially in system integrity, are subject to regulatory review and approval, introducing risks of increased costs or lower-than-expected returns if not approved or modified.
  
• The wider earnings guidance range suggests potential financial uncertainties or variabilities, which could lead to less predictable financial outcomes, impacting investor confidence and net margins.

Valuation

• The analysts have a consensus price target of $53.14 for New Jersey Resources 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 $60.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $352.2 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 5.9%.
• Given the current share price of $47.52, the analyst's price target of $53.14 is 10.6% 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.