Data Center Developments In Pennsylvania Will Present $600 Million Investment Opportunity

Key Takeaways

• Focus on infrastructure and cleaner energy investments, plus rate base growth, aims for revenue and earnings increases.
  
• Operational savings and ambitious generation plans extend earnings and dividend growth through efficiency and energy sales boost.
  
• Increased operational and capital costs could pressure earnings, with regulatory delays and financing needs potentially impacting margins and earnings per share.

Catalysts

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

• PPL's updated business plan includes $20 billion in expected infrastructure investments from 2025 through 2028, focusing on strengthening grid reliability and advancing a cleaner energy mix, which is expected to drive average annual rate base growth of between 9.5% and 10%, impacting revenue growth.
  
• The integration of Rhode Island Energy and operational efficiency improvements are set to yield cumulative annual O&M savings of at least $175 million through 2026, enhancing operating margins.
  
• The company anticipates extending its 6% to 8% annual earnings and dividend growth through at least 2028, with a focus on achieving the top half of the growth rate range, driven by significant rate base growth, impacting earnings growth.
  
• PPL is advancing plans for new generation in Kentucky, including a combined-cycle natural gas plant, solar, and battery storage projects to meet future load growth, which will increase energy sales and support revenue growth.
  
• The data center development in its service territories, especially in Pennsylvania, presents a potential $600 million to $700 million transmission capital investment opportunity, driving revenue growth through increased infrastructure investment.

PPL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PPL's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 17.8% 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 30.2x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.5x.
• 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

• Increased vegetation management spending and storm-related costs could pressure future earnings, impacting net margins if not fully recoverable or offset by other efficiencies.
  
• The need for substantial equity financing ($2.5 billion) to support increased capital investments might dilute earnings per share, affecting overall earnings growth.
  
• Regulatory lag experienced in the process of securing rate increases might delay revenue realization from investments, which could impact revenue timing and net margins.
  
• The planned investments in infrastructure and generation capacity in Kentucky depend on approval from regulatory bodies, presenting a risk of delays or modifications that could affect projected earnings.
  
• High interest expenses from increased debt used to finance capital projects might impact net earnings, potentially narrowing profit margins if interest rates rise further.

Valuation

• The analysts have a consensus price target of $36.694 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 $9.0 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 $36.21, the analyst price target of $36.69 is 1.3% 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.