NJR's Tactical Shift To Clean Energy And Efficiency Aims For Robust Growth And Stability

Key Takeaways

• Anticipated resolution of rate case by end of 2024 may stabilize the regulatory environment and improve financial stability, enhancing investor confidence.
  
• Expansion into Clean Energy and strategic investments suggest significant future revenue from renewable sources and potential for increased customer growth and satisfaction.
  
• Reliance on regulatory outcomes, increased expenses, and renewable investment volatility could strain New Jersey Resources' finances if expected growth fails to materialize.

Catalysts

An energy services holding company, distributes natural gas.

• The anticipated resolution of the ongoing rate case before the end of 2024 will likely provide a clearer regulatory environment and financial stability, impacting investor confidence and potentially improving NJR's net margins by reducing regulatory uncertainty.
  
• Expansion in Clean Energy Ventures, with a solid year-over-year revenue growth and expanding project pipeline, suggests significant future revenue generation capabilities from renewable energy sources, likely enhancing overall revenue growth.
  
• The strategic capital investments in New Jersey Natural Gas and the SAVEGREEN program, which both help customers lower their energy usage and contribute to environmental sustainability, are poised to enhance customer growth and satisfaction, potentially leading to increased revenue from new constructions and conversions.
  
• The adjustments to the fiscal 2024 guidance due to outperformance at Energy Services indicate operational efficiency and the potential for higher-than-expected earnings, impacting future earnings growth positively.
  
• Investments across the company, with an expectation to invest between $1.2 billion and $1.5 billion over the next 2 years, support future growth opportunities and infrastructure development, potentially leading to increased operational capacity and revenue generation.

Assumptions

• Analysts are assuming New Jersey Resources's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.6% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $327.4 million (and earnings per share of $3.27) by about September 2027, up from $235.7 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 18.6x on those 2027 earnings, down from 19.4x today. This future PE is greater than the current PE for the US Gas Utilities industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 1.65% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The reliance on expected outcomes from regulatory rate cases for financial performance could introduce volatility in earnings if resolutions are less favorable than anticipated, impacting net margins and overall profitability of the utility segment.
  
• Increased depreciation and interest expenses as highlighted in their financial results could strain net margins, especially if the anticipated growth in revenues from new investments does not materialize as expected.
  
• The significant planned capital expenditures over the next two years could impact cash flow negatively if there is a shortfall in projected cash flow from operations, affecting the company's ability to finance growth without resorting to potentially dilutive equity issuances or higher-cost debt.
  
• A net financial loss reported in the current period, primarily attributed to the Clean Energy Ventures segment, suggests potential volatility in earnings from renewable investments, which could continue to affect net margins negatively if similar trends persist.
  
• The projection of substantial liquidity and no significant debt maturities until after fiscal 2024 might pose a risk if anticipated cash flows do not meet expectations, leading to potential challenges in managing debt levels and possibly affecting earnings.

Valuation

• The analysts have a consensus price target of $49.43 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 $57.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.3 billion, earnings will come to $327.4 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 5.8%.
• Given the current share price of $46.03, the analyst's price target of $49.43 is 6.9% higher. The relatively low difference between the current share price and the analyst consensus 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.