Georgia's Industrial Expansion Will Increase Future Energy Demand

Key Takeaways

• Economic development and new industrial demand could boost Southern Company's electricity sales and long-term revenue growth.
  
• Strategic investments and infrastructure modernization may increase operational efficiency, supporting future profitability and competitive advantage.
  
• Storm-related costs and regulatory uncertainty may strain financials, while flat electricity sales and inflation pressures challenge revenue and profitability.

Catalysts

Through its subsidiaries, engages in the generation, transmission, and distribution of electricity.

• Strong economic development activity across Southern Company's electric service territories, with 42 companies establishing or expanding operations in the third quarter, generating over 5,000 new jobs and representing capital investments totaling approximately $2.6 billion, could translate into increased electricity sales and higher revenue growth for the company.
  
• The growing pipeline for new industrial and large load commercial customers, particularly with Georgia Power's potential load additions projected to grow to over 36 gigawatts by the mid-2030s, suggests significant long-term demand, which should positively impact future earnings and revenue.
  
• The recovery and rebuilding efforts following Hurricane Helene, while initially costly, may result in a modernized and more resilient infrastructure, potentially increasing operational efficiency and reliability, which could improve net margins over time.
  
• Continued investment in state-regulated utilities and customer growth, despite the challenges of higher interest, depreciation, and operating expenses, indicates a strategic positioning for future EPS growth as the company capitalizes on increasing energy demand.
  
• Potential regulatory processes and technologies being explored, such as new nuclear opportunities and carbon capture, present avenues for long-term growth and sustainability. Successfully navigating these could enhance Southern Company's competitive edge and future profitability.

Southern Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southern's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.9% today to 18.1% in 3 years time.
• Analysts expect earnings to reach $5.3 billion (and earnings per share of $4.76) by about December 2027, up from $4.7 billion 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 23.0x on those 2027 earnings, up from 19.3x today. This future PE is greater than the current PE for the US Electric Utilities industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Southern Future Earnings Per Share Growth

Risks

• The significant costs associated with Hurricane Helene's damage, estimated at $1.1 billion, could impact Southern Company's financials, particularly in terms of capital expenditures and operating margins.
  
• The uncertainty regarding the recovery of storm-related costs and regulatory outcomes could create financial strain, affecting cash flow and net earnings.
  
• Inflationary pressures on recovery costs, such as labor, supplies, and fuel, may further increase expenses beyond initial estimates, impacting net margins.
  
• Flat electricity sales growth, especially with residential usage per customer slightly down, may limit revenue increases despite customer growth in electric and gas distribution.
  
• Dependence on regulatory processes for storm cost recovery and potential delays or unfavorable rulings could affect earnings consistency and utility pricing, impacting revenue and profitability.

Valuation

• The analysts have a consensus price target of $92.02 for Southern 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 $104.0, 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 2027, revenues will be $29.4 billion, earnings will come to $5.3 billion, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $83.28, the analyst's price target of $92.02 is 9.5% higher.
• 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.