Oregon Utility's Decisive Investments In Clean Energy And Efficiency Promise Rising Revenues And Profits

Key Takeaways

• Initiatives in renewable energy and decarbonization position the company for growth by tapping into clean energy demand, potentially improving margins.
  
• Proactive rate case filings and significant investments in safety, reliability, and technology indicate a strategy for long-term growth and customer satisfaction.
  
• Regulatory, inflationary, and competitive challenges, alongside the execution risks of green initiatives, could strain earnings, profitability, and long-term growth.

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 low unemployment rate in Oregon, paired with significant employment growth and an increase in single-family housing permits, suggests a favorable economic environment, potentially driving customer growth and subsequently increasing revenue.
  
• Substantial investments in safety, reliability, and technology, alongside necessary investments to meet increasing quality standards in water and wastewater utilities, indicate a strategy for sustaining long-term growth and improving service quality, which could positively impact revenue and margins through improved efficiency and customer satisfaction.
  
• Filing of rate cases for gas and water utilities to address inflationary pressures and operational expenses shows proactive management actions to secure revenue requirements which could safeguard margins and ensure stable cash flow by recovering costs and securing a return on investments.
  
• The settlement in the Oregon gas utility rate case, with a revenue requirement increase and expectations of a commission order, suggests an imminent positive impact on revenue through rate adjustments, supporting long-term financial stability and growth.
  
• Initiatives in decarbonization and renewable energy, including investments in renewable natural gas and hydrogen pilots, position the company for future growth by tapping into the growing demand for clean energy solutions, which could lead to new revenue streams and potentially higher margins due to favorable regulatory support and incentives.

Assumptions

• Analysts are assuming Northwest Natural Holding's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $126.1 million (and earnings per share of $3.06) by about October 2027, up from $82.0 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 17.5x on those 2027 earnings, down from 19.1x today. This future PE is greater than the current PE for the US Gas Utilities industry at 17.4x.
• Analysts expect the number of shares outstanding to grow by 2.09% 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

• Regulatory lag on capital investments and inflationary pressures are leading to lower earnings, which could negatively impact net margins and earnings per share (EPS).
  
• The dependency on successful regulatory rate case outcomes, including the ability to pass on inflationary cost increases and investments to consumers, poses risks to revenue and EPS stability.
  
• Increased competition and operational challenges in expanding the water and wastewater utilities could affect the projected customer and revenue growth, impacting future revenues.
  
• The environmental and technological advancements, such as the adoption of renewable natural gas and hydrogen initiatives, carry execution risks and require significant capital, potentially impacting long-term profitability and cash flow.
  
• The overall cost of capital increasing could constrain further capital deployment towards growth and decarbonization initiatives, affecting long-term growth rates and return on equity (ROE).

Valuation

• The analysts have a consensus price target of $45.33 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 $61.0, and the most bearish reporting a price target of just $39.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $126.1 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 5.8%.
• Given the current share price of $40.55, the analyst's price target of $45.33 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.