Arizona's Economic Growth And Regulatory Improvements Will Support Future Success

Key Takeaways

• Formula rates and improved regulation could enhance revenue by reducing delays, boosting net margins and earnings.
  
• Arizona's economic growth and strategic investments in energy could drive higher future earnings and revenue.
  
• Leadership changes and regulatory uncertainties, alongside rising costs and financial liabilities, could strain Pinnacle West Capital's profitability and impact strategic direction and earnings.

Catalysts

Through its subsidiary, provides retail and wholesale electric services primarily in the state of Arizona.

• The constructive outcome in Pinnacle West Capital's recent rate case and the commission's commitment to reducing regulatory lag with policies like formula rates could enhance future revenue and reduce costs related to regulatory delays. This can lead to improved net margins and earnings.
  
• Arizona's strong economic growth, driven by an increase in commercial and industrial customers, including significant investments in semiconductor manufacturing, is expected to boost revenues through higher energy demand.
  
• Pinnacle West Capital's strategic investments in generation, transmission, and distribution to meet Arizona's economic and population growth could drive higher future earnings and revenue.
  
• The company's focus on improving timely investment recovery through innovative rate design and securing mechanisms for better cost recovery could contribute to higher net margins and earnings stability.
  
• Continued strong residential and C&I customer growth and an improving customer experience could lead to sustained revenue growth and potentially higher profit margins.

Pinnacle West Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pinnacle West Capital's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $712.1 million (and earnings per share of $5.68) by about March 2028, up from $608.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $795 million in earnings, and the most bearish expecting $604 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.8x on those 2028 earnings, up from 18.3x today. This future PE is greater than the current PE for the US Electric Utilities industry at 20.8x.
• Analysts expect the number of shares outstanding to grow by 4.88% 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.

Pinnacle West Capital Future Earnings Per Share Growth

Risks

• Ashton Grup's retirement as CEO and the transition to new leadership could introduce uncertainties and challenges that may affect the company's strategic direction and financial performance, impacting earnings.
  
• Regulatory changes, like the introduction and implementation of formula rate plans, present uncertainties that can affect the company's ability to recover investments promptly, potentially impacting net margins.
  
• Increasing operating costs, including O&M, D&A, and financing costs, could pressure profitability and net margins, affecting future earnings.
  
• The forecasted robust growth in capital expenditures (CapEx) to strengthen infrastructure and meet demand could strain financial resources and lead to higher debt levels, impacting net margins and earnings.
  
• Potential regulatory and legislative risks, such as those related to wildfire liability and mitigation, could result in significant financial liabilities or increased costs, affecting revenue and net margins.

Valuation

• The analysts have a consensus price target of $94.422 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 $110.0, and the most bearish reporting a price target of just $80.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $712.1 million, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 6.2%.
• Given the current share price of $93.38, the analyst price target of $94.42 is 1.1% 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.