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Key Takeaways
- Increased revenue potential through new customer rates and sales growth in Commercial & Industrial sectors.
- Efficiency improvements and strategic capital investments suggest future enhancements in operational reliability and net margins.
- Regulatory uncertainty, rising O&M costs, interest rates, weather-related demand volatility, and unpredictable customer growth could significantly impact Pinnacle West's earnings and revenue.
Catalysts
About Pinnacle West Capital- Through its subsidiary, provides retail and wholesale electric services primarily in the state of Arizona.
- Implementation of new customer rates indicates potential for increased revenue through higher billing rates.
- Increased sales growth from both new and existing customers, especially in Commercial & Industrial (C&I) sectors like manufacturing and data centers, suggests future revenue growth.
- Operational and maintenance (O&M) savings highlight efficiency improvements that could lead to higher net margins by lowering operational costs.
- Strategic capital investments in grid and technology, despite increasing short-term depreciation and amortization expenses, are expected to enhance long-term operational efficiency and reliability, contributing to revenue and margin improvement.
- Active participation in regulatory proceedings aimed at reducing regulatory lag suggests potential for more timely recovery of invested capital, positively affecting earnings.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Pinnacle West Capital's revenue will grow by 3.5% annually over the next 3 years.
- Analysts are assuming Pinnacle West Capital's profit margins will remain the same at 12.7% over the next 3 years.
- Analysts expect earnings to reach $688.8 million (and earnings per share of $5.49) by about September 2027, up from $618.9 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 16.9x on those 2027 earnings, up from 16.1x today. This future PE is lower than the current PE for the US Electric Utilities industry at 19.7x.
- Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- Regulatory uncertainty surrounding the proceedings aimed at reducing regulatory lag in Arizona could potentially impact Pinnacle West's ability to timely recover investments, thus affecting earnings.
- Increasing operational and maintenance (O&M) costs, particularly with large planned outages noted for this year, could pressure net margins if not effectively managed or offset by operational efficiencies.
- Financial strategy and interest rates, especially with the noted increase in interest expenses due to higher debt balances, could negatively impact net income if borrowing costs continue to rise.
- The reliance on weather-related demand, while beneficial in the short term due to record heat, introduces volatility in earnings that could be detrimental if future weather patterns are milder than expected, potentially affecting revenue growth.
- Changes in customer growth rates and sales volumes, particularly if the expected continuation of robust customer and sales growth does not materialize as projected, could negatively impact future revenues and earnings.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $86.45 for Pinnacle West Capital 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 $95.0, and the most bearish reporting a price target of just $77.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.4 billion, earnings will come to $688.8 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 5.8%.
- Given the current share price of $87.81, the analyst's price target of $86.45 is 1.6% 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.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.