Investments In Reliability And Digital Technologies Will Improve Efficiency

Key Takeaways

• Investments in technology and infrastructure are set to lower costs and boost margins, enhancing financial performance and earnings.
  
• Continued customer growth and increased demand driven by strong economic conditions suggest potential for elevated future revenues.
  
• Increased financial risk from investments, regulatory delays, and reliance on volatile sectors could impact earnings and growth potential amid rising expenses and leverage.

Catalysts

Operates as an energy services provider in the United States.

• The robust demand for energy across all sectors and continued customer growth that is outpacing historical norms suggests an increase in future revenues.
  
• Investments in reliability, automated technology, and digital self-service technologies are expected to reduce operational costs and therefore potentially improve net margins.
  
• Anticipated approval in 2025 for additional generation capacity and continued investments in generation and transmission could drive significant earnings growth.
  
• Strong regional economic conditions and business expansions, especially in sectors like defense and manufacturing, indicate higher future demand, which will likely lead to increased revenues.
  
• A constructive regulatory environment, coupled with effective cost management, supports expectations for stable earnings growth, enhancing overall financial performance and boosting EPS.

OGE Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OGE Energy's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.9% today to 15.7% in 3 years time.
• Analysts expect earnings to reach $510.8 million (and earnings per share of $2.51) by about December 2027, up from $387.8 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 19.3x on those 2027 earnings, down from 21.6x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.4% 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.

OGE Energy Future Earnings Per Share Growth

Risks

• The company's third quarter net income decreased compared to the same period in 2023, driven by higher depreciation, interest expense, and O&M costs, which could impact overall earnings.
  
• Additional investments in generation capacity through the IRP RFP process add financial risk, impacting both earnings and capital allocation, depending on regulatory approvals and execution success.
  
• Regulatory approval delays in Oklahoma may affect their ability to recognize earnings from the interim rates, potentially affecting expected revenue and financial performance for the year.
  
• High reliance on weather-normalized load growth, with a significant portion driven by volatile sectors like crypto mining, presents a risk to sustained revenue if these sectors face downturns.
  
• The higher financial leverage anticipated to fund new projects, amid current capital allocation and interest expenses, could limit net margins and earnings growth if revenue expectations don't materialize.

Valuation

• The analysts have a consensus price target of $40.91 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 $46.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.2 billion, earnings will come to $510.8 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 5.9%.
• Given the current share price of $41.78, the analyst's price target of $40.91 is 2.1% 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.