Industry Partnerships And Grid Resilience Will Shape Future Success

Key Takeaways

• Strategic expansion into industries and partnerships for major events indicate potential for sustained revenue growth through increased demand and customer acquisitions.
  
• Investments in grid resilience and financial discipline are likely to enhance operational efficiency and maintain stable earnings growth.
  
• Regulatory challenges, credit outlook issues, and sector vulnerabilities may lead to financial instability, impacting revenue growth and overall earnings stability.

Catalysts

Through its subsidiary, operates as an energy services provider in the United States.

• OGE Energy is experiencing customer growth and increased electricity demand, notably with an 8% demand growth quarter-over-quarter, which is expected to support future revenue growth.
  
• Strategic expansion in industries such as defense, travel, hospitality, and new data center projects (e.g., partnerships for the 2028 Olympics and discussions with companies like Google) suggests potential for sustained revenue growth through increased base load and new customer acquisitions.
  
• Grid and weather resilience investments are expected to enhance operational excellence, potentially leading to higher net margins by improving reliability and reducing costs associated with outages and infrastructure damage.
  
• Upcoming regulatory filings, including those for generation capacity and potential pre-approval processes, may create opportunities for capital recovery, positively impacting earnings and cash flow management.
  
• Strong financial discipline and strategic planning, including securing materials and managing exposure to supply chain disruptions, are expected to maintain or enhance OGE’s credit profile, supporting stable earnings growth.

OGE Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OGE Energy's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.5% today to 15.7% in 3 years time.
• Analysts expect earnings to reach $538.8 million (and earnings per share of $2.63) by about May 2028, up from $485.6 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 20.0x on those 2028 earnings, up from 18.8x today. This future PE is lower than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.39% 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.

OGE Energy Future Earnings Per Share Growth

Risks

• The mention of ongoing regulatory actions and the need for future filings with respect to new generation could present risks if the outcomes are not favorable, potentially affecting revenue and earnings.
  
• Moody's negative outlook on the company's credit rating poses a risk, as it could lead to higher borrowing costs in the future, impacting net margins and overall financial flexibility.
  
• The softness observed in the industrial and oilfield customer classes due to unplanned outages might indicate vulnerability in sustaining consistent revenue growth from these sectors.
  
• The potential impact of evolving tariff or macroeconomic factors on industrial load growth and overall revenues could pose a challenge if not managed effectively.
  
• External factors, such as legislative and regulatory outcomes related to credit enhancement and financial strategies, are outside the company's control and could lead to increased financial uncertainty, influencing earnings stability.

Valuation

• The analysts have a consensus price target of $44.374 for OGE Energy 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 $52.0, 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 2028, revenues will be $3.4 billion, earnings will come to $538.8 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 6.2%.
• Given the current share price of $45.27, the analyst price target of $44.37 is 2.0% lower. 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.