Investments In Modernizing Texas Infrastructure Will Support Future Expansion

Key Takeaways

• The acquisition of SiEnergy and rate base growth in Texas bolster long-term revenue and earnings growth potential.
  
• Integration of renewables and infrastructure investments are set to enhance net margins and positions for future asset growth.
  
• Regulatory delays and increased debt costs challenge net margins, while growth funding dilutes earnings, posing risks to revenue stability and free cash flow.

Catalysts

Through its subsidiary, Northwest Natural Gas Company, provides regulated natural gas distribution services to residential, commercial, and industrial customers in the United States.

• The acquisition of SiEnergy in Texas, which has shown strong customer growth of 22% from 2021 to 2024 and is expected to continue double-digit growth, provides a significant driver for long-term revenue and earnings growth.
  
• The completion of the largest Oregon gas utility rate case in their history, which increased revenue requirements by $93.3 million, is expected to positively impact revenue and earnings.
  
• The integration and growth of Northwest Natural Renewables, with operational renewable natural gas facilities providing steady cash flows and future revenue growth, are expected to boost net margins and earnings over time.
  
• The increased capital expenditure guidance, with expected investments in modernizing infrastructure and supporting growth in Texas, positions the company for future growth in asset base and revenue, with a long-term earnings per share growth rate of 4% to 6% compounded annually.
  
• Projected significant rate base growth for SiEnergy (20% to 25% from 2025 to 2027) and water and wastewater utilities' expected net income growth of 10% to 15% over the same period contribute to the long-term growth potential in earnings.

Northwest Natural Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northwest Natural Holding's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $138.1 million (and earnings per share of $3.23) by about March 2028, up from $78.9 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 19.1x on those 2028 earnings, down from 21.2x today. This future PE is about the same as the current PE for the US Gas Utilities industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 5.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Northwest Natural Holding Future Earnings Per Share Growth

Risks

• The company experienced a decrease in adjusted net income in 2024 compared to the previous year, largely due to regulatory lag, which could negatively impact net margins if similar delays occur in the future.
  
• The issuance of common stock to finance long-term growth capital diluted earnings per share, suggesting potential future dilution that may affect overall earnings.
  
• Interest expense increased due to higher short-term debt financing, which could pressure net income if interest rates rise further or if debt levels increase.
  
• Significant capital expenditures are projected, and while these are related to growth initiatives, they may constrain free cash flow if not matched by proportional revenue growth.
  
• Dependence on successful regulatory outcomes, such as the completion of the Oregon general rate case, poses a risk to revenue stability and could impact earnings if outcomes are less favorable than projected.

Valuation

• The analysts have a consensus price target of $46.8 for Northwest Natural Holding 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 $56.0, and the most bearish reporting a price target of just $42.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $138.1 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $41.61, the analyst price target of $46.8 is 11.1% 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.