Enel Acquisition And New PPAs Will Strengthen Future Earnings Stability

Key Takeaways

• The acquisition of Enel assets and new PPAs are expected to boost revenue growth, profitability, and net margins.
  
• Strategic financial moves and new energy projects aim to stabilize revenue streams and enhance future earnings.
  
• Curtailments, unexpected outages, high capital expenditures, and reliance on Chinese imports create significant risks to Ormat's profitability and future revenue growth.

Catalysts

Engages in the geothermal and recovered energy power business in the United States, Indonesia, Kenya, Turkey, Chile, Guatemala, Guadeloupe, New Zealand, Honduras, France, Indonesia, the Philippines, and internationally.

• The successful acquisition of Enel assets has boosted Ormat's revenues and EBITDA, enhancing revenue growth and profitability prospects.
  
• The signing of new Power Purchase Agreements (PPAs) at higher rates for plants like Mammoth 2 is expected to increase future revenue and boost net margins.
  
• The addition of new facilities to the Energy Storage segment, such as the Bottleneck project and new agreements in Texas and California, is expected to stabilize revenue streams and improve earnings consistency.
  
• Strategic financial management, including raising over $500 million in debt and securing tax benefits, is likely to support the company's profitability and growth in earnings.
  
• The record backlog in the Product segment driven by large contracts, such as the one in New Zealand, indicates strong future revenue potential and margin expansion opportunities.

Ormat Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ormat Technologies's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.1% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $152.7 million (and earnings per share of $2.7) by about April 2028, up from $123.7 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 39.5x on those 2028 earnings, up from 34.6x today. This future PE is greater than the current PE for the US Renewable Energy industry at 32.3x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Ormat Technologies Future Earnings Per Share Growth

Risks

• The unexpected impact of curtailment in the Electricity segment, particularly in the U.S. and Kenya, has shown to reduce revenue and profits, with continued curtailments expected to negatively impact 2025 revenue by $10 million to $15 million.
  
• The declining gross profit margins observed due to curtailments and unexpected outages, such as those at Dixie Valley, can affect the net margins and overall profitability of the company.
  
• The necessity of ongoing significant capital expenditure, with $570 million planned for 2025, may strain the company's cash flow, especially if revenue does not grow as rapidly as anticipated, potentially affecting net income margins.
  
• Fluctuations in the Energy Storage segment, with potential impacts from tariffs on Chinese imports, pose risks to profit margins and stable revenue growth given the reliance on Chinese imports for storage assets.
  
• Execution risk in the exploration and early-stage drilling activities could delay new project additions, impacting future revenue growth if this activity does not result in successful new capacity by the desired timelines.

Valuation

• The analysts have a consensus price target of $82.8 for Ormat Technologies 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 $100.0, and the most bearish reporting a price target of just $75.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $152.7 million, and it would be trading on a PE ratio of 39.5x, assuming you use a discount rate of 6.7%.
• Given the current share price of $70.77, the analyst price target of $82.8 is 14.5% 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.