Capital Investment Will Modernize New Jersey Energy Infrastructure

Key Takeaways

• PSEG's capital investment plan and focus on infrastructure modernization are poised to drive sustained earnings growth and enhance customer satisfaction.
  
• Legislative changes and energy efficiency programs offer opportunities for PSEG to expand generation assets and boost revenues, supporting economic growth in New Jersey.
  
• Regulatory uncertainties and operational cost pressures may impact PSEG's revenue, margins, and customer satisfaction amidst rising energy prices and demand challenges.

Catalysts

Through its subsidiaries, operates in electric and gas utility, and nuclear generation businesses in the United States.

• PSEG's ongoing regulated capital investment plan, totaling $21 billion to $24 billion through 2029, is expected to drive a 6% to 7.5% CAGR in rate base and a 5% to 7% CAGR in non-GAAP operating earnings, enhancing long-term earnings growth.
  
• Increasing inquiries for large load or data center customers highlight potential demand growth. If these convert into new utility customers, spreading fixed costs over a larger user base may drive down existing customer bills, supporting revenue growth.
  
• PSEG's focus on infrastructure modernization and energy efficiency programs can lead to cost savings for customers and increased demand for the company’s services, positively impacting revenue and net margins by reducing customer churn and enhancing customer satisfaction.
  
• New Jersey legislation being introduced to allow regulated utilities to build and own new generation could provide PSEG with opportunities to expand its generation assets and capitalize on increased demand, potentially leading to revenue and earnings growth.
  
• The expansion of PSEG's Clean Energy Future Energy Efficiency program and increased interest from new large-load customers can support economic growth and job creation in New Jersey, bringing additional revenues and increasing margins through enhanced efficiency and effectiveness of energy delivery.

Public Service Enterprise Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Public Service Enterprise Group's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.0% today to 19.4% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $4.7) by about May 2028, up from $1.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US Integrated Utilities industry at 21.4x.
• Analysts expect the number of shares outstanding to grow by 0.18% 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.

Public Service Enterprise Group Future Earnings Per Share Growth

Risks

• The regulatory uncertainty surrounding New Jersey's potential changes to allow regulated utilities to build new generation may delay PSEG's ability to respond to increased demand, impacting future revenue and margins.
  
• The 17% increase in residential electric bills due to capacity pricing, combined with ongoing upward pressure on energy prices without additional supply, could affect customer satisfaction and retention, impacting future revenues.
  
• Rising operational and maintenance costs due to inflation and higher nuclear costs, as well as increased interest expenses, may put pressure on net margins despite the company's efforts to maintain financial flexibility.
  
• The significant interest in new service connections may not fully materialize; PSEG recognizes that only a fraction (10-20%) of the 6,400 megawatts of capacity requested is likely to become actual customers, potentially limiting expected future revenue growth.
  
• Political and regulatory challenges regarding supply adequacy and customer affordability, including efforts by New Jersey's governor to challenge PJM auction results, add uncertainty to PSEG’s ability to stabilize energy costs, which could impact both customer satisfaction and future revenue stability.

Valuation

• The analysts have a consensus price target of $86.507 for Public Service Enterprise Group 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 $102.0, and the most bearish reporting a price target of just $70.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.3 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $79.7, the analyst price target of $86.51 is 7.9% 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.