Pipeline And IRP Upgrades Will Spur Energy Infrastructure Expansion

Key Takeaways

• Strategic investment in energy infrastructure and services is poised to boost future revenue and earnings through increased demand and reliability enhancements.
  
• Effective financial and regulatory strategies aim to stabilize margins and maintain credit strength, supporting Southern's capacity for capital-intensive growth.
  
• Potential risks include global tariffs, policy uncertainties, regulatory processes, and lower electricity demand impacting operational costs, net margins, and revenue growth.

Catalysts

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

• Southern Company anticipates substantial growth in its large load pipeline, which includes data centers and large manufacturers, potentially increasing demand by over 50 gigawatts by the mid-2030s. This could significantly boost revenue through increased electricity sales.
  
• Economic development activity in Southern Company's service territories is robust, with over $11 billion in capital investments and 4,000 new jobs announced in Q1 2025. This positions the company for increased revenue from heightened commercial and industrial activity.
  
• The Georgia Power Integrated Resource Plan (IRP) includes proposed upgrades and life extensions for nuclear and natural gas facilities, as well as hydro modernization. These strategic investments aim to enhance long-term reliability and capacity, potentially leading to improved earnings.
  
• Successful regulatory and tariff navigation, including ongoing RFPs for 13 gigawatts of new energy resources and proactive mitigation of tariff impacts, could stabilize or enhance net margins by managing costs effectively.
  
• Southern Company's disciplined approach to financing, including the issuing of debt and equity, helps maintain strong credit ratings and investment-grade status. This prudent financial management supports stable earnings and positions the company well for future capital-intensive projects.

Southern Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southern's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.5% today to 18.5% in 3 years time.
• Analysts expect earnings to reach $5.7 billion (and earnings per share of $4.94) by about May 2028, up from $4.6 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 21.8x on those 2028 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.51% 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.

Southern Future Earnings Per Share Growth

Risks

• The potential impact of global tariffs and policy uncertainties could increase operational costs, potentially affecting net margins and earnings if not effectively mitigated.
  
• Higher operating costs, depreciation, and amortization partially offset earnings growth, which might pressure net margins and earnings in future periods.
  
• Weather-normalized retail electricity sales were 0.3% lower year-over-year, with a decline in residential electricity usage suggesting potential risk to revenue growth.
  
• Return to office trends and proactive customer energy management in response to inflation and economic uncertainty could dampen future electricity demand, impacting revenue.
  
• Ongoing regulatory processes and future rate cases, particularly in Georgia, present potential risks to revenue stability depending on the outcomes and how they align with customer affordability concerns.

Valuation

• The analysts have a consensus price target of $92.535 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 $72.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $30.7 billion, earnings will come to $5.7 billion, 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 $91.22, the analyst price target of $92.53 is 1.4% 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.