Rate Cases, Infrastructure Growth, And RNG Facilities Drive Revenue And Profit Margins Upward

Key Takeaways

• Regulatory rate increases in Oregon and Arizona, along with reduced regulatory lag, position the company for stronger revenue and net margins.
  
• Acquisitions and RNG facilities rollout enhance the company's water segment and create steady revenue streams, supporting future growth.
  
• Regulatory challenges, rising costs, and potential financing needs could negatively impact Northwest Natural's margins and financial stability, despite anticipated lower financing requirements.

Catalysts

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

• Completion of rate cases in Oregon and Arizona is expected to lead to increased revenue through approved rate increases, which should support future earnings growth.
  
• The acquisition of Puttman Infrastructure and ICH strengthens NW Natural Water's customer base in multiple states, which could drive future revenue increases and bolster the company's water segment earnings.
  
• The rollout of two landfill RNG facilities is expected to provide a full year of revenues and cash flows by 2025, supporting steady revenue streams and potentially enhancing margins due to long-term fixed-price offtake agreements.
  
• Customer growth in single-family housing permits and improving employment rates in service territories are anticipated to drive revenue growth and support a stable customer base.
  
• Expected reduction in regulatory lag and inflationary pressures due to the recent Oregon gas utility rate case positions the company for improved future net margins and overall financial performance.

Northwest Natural Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northwest Natural Holding's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $127.2 million (and earnings per share of $3.11) by about November 2027, up from $78.5 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 16.9x on those 2027 earnings, down from 21.4x today. This future PE is lower than the current PE for the US Gas Utilities industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 0.67% 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.

Northwest Natural Holding Future Earnings Per Share Growth

Risks

• The decision to forgo recovery of $13.7 million of rate base related to line extension allowances results in a $10.1 million after-tax noncash disallowance, potentially impacting Northwest Natural's net margins negatively due to this regulatory setback.
  
• Continued regulatory lag on investments and inflationary pressures are reported as key challenges, which might suppress net income growth and margins if such pressures continue without timely regulatory relief.
  
• Increased depreciation and amortization expenses, coupled with higher interest and pension costs, could continue dampening earnings, as higher operational costs might offset gains from rate increases.
  
• The multiyear rate case discussion was described as unclear and unresolved, which introduces regulatory uncertainty, potentially affecting long-term revenue stability and financial planning.
  
• The company anticipates lower equity and debt financing needs for the coming year, but any unexpected financial strain or investment requirement could necessitate additional financing, which might affect shareholder value and earnings if executed unfavorably.

Valuation

• The analysts have a consensus price target of $45.17 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 $55.0, 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 $127.2 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 5.9%.
• Given the current share price of $41.84, the analyst's price target of $45.17 is 7.4% 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.