Pennsylvania Data Centers And Grid Upgrades Will Energize Future Utility Success

Key Takeaways

• PPL's utility of the future strategy with significant capital investments and IT transformation could drive revenue and improve operational efficiency, enhancing net margins.
  
• Strategic initiatives in the data center sector and legislative efforts offer PPL revenue growth and diversification, positively impacting future earnings.
  
• Regulatory risks and potential project delays could significantly impact PPL's infrastructure investments, revenue stability, and long-term earnings forecasts.

Catalysts

Provides electricity and natural gas to approximately 3.5 million customers in the United States.

• PPL's ongoing execution of its utility of the future strategy, including a projected $20 billion in capital investments from 2025 to 2028 for grid reliability, generation improvements, and efficiency upgrades, is expected to support a 9.8% average annual rate base growth. This should drive higher future revenue.
  
• PPL is advancing its IT transformation to enhance grid operations and cybersecurity, which is expected to lower ongoing technology costs and improve operational efficiency. This could result in improved net margins.
  
• The company's focus on delivering at least $150 million in cumulative O&M savings compared to a 2021 baseline is expected to support customer affordability and enhance corporate profitability, positively impacting net margins.
  
• PPL's strategic initiatives in the data center sector, with nearly 11 gigawatts of projects in advanced stages in Pennsylvania, along with supportive contracts that mitigate stranded asset risk, are anticipated to drive significant revenue growth.
  
• Legislative advocacy in Pennsylvania for allowing regulated utilities to invest in generation resources, alongside existing growth initiatives and economic development strategies in Kentucky, could provide PPL with enhanced revenue and diversification opportunities that positively affect future earnings.

PPL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PPL's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 17.7% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $2.1) by about April 2028, up from $886.0 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 20.3x on those 2028 earnings, down from 30.4x today. This future PE is lower than the current PE for the US Electric Utilities industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 0.07% 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.

PPL Future Earnings Per Share Growth

Risks

• The potential introduction of tariffs could significantly impact PPL's costs related to its planned 400 megawatts of battery storage, potentially affecting the capital expenditures and ultimately the company's net margins.
  
• The retirement of coal plants in Kentucky and replacement with natural gas plants could face regulatory delays or increased costs, posing a risk to planned infrastructure expenditure and net earnings.
  
• Data center projects, while promising increased load, have inherent risks such as delays in announcements or execution, and possibility of stranded asset costs which could influence PPL’s revenue stability.
  
• The effectiveness of PPL's proposed generation projects in Pennsylvania is contingent on new legislative changes, which carries regulatory risk that may affect long-term earnings forecasts.
  
• Increased interest in data centers poses a challenge to Pennsylvania's current energy capacity, and delays in data center approvals and integrations could temper expected load growth revenues.

Valuation

• The analysts have a consensus price target of $36.819 for PPL 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 $40.0, and the most bearish reporting a price target of just $33.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.1 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $36.39, the analyst price target of $36.82 is 1.2% 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.