Missouri Senate Bill 4 Will Secure A Stable Future

Key Takeaways

• Spire's capital investment plan and infrastructure focus are poised to boost long-term growth, targeting improved revenue and earnings.
  
• Missouri's Senate Bill 4 and Spire's regulatory efforts may enhance financial performance through favorable rate setting and stable revenue.
  
• Spire faces challenges in earnings stability and margin pressures due to ineffective weather mechanisms, rising borrowing costs, increased capital expenditure, and regulatory uncertainties.

Catalysts

Engages in the purchase, retail distribution, and sale of natural gas to residential, commercial, industrial, and other end-users of natural gas in the United States.

• Spire's 10-year $7.4 billion capital investment plan, primarily focused on organic growth and utility infrastructure, is expected to drive long-term growth in the rate base and underpin an EPS growth target of 5% to 7%, impacting future revenue and earnings.
  
• The newly passed Senate Bill 4 in Missouri introduces a future test year rate setting model, enabling utilities to base rates on projected costs rather than historical expenses from July 2026, which could lead to more favorable revenue outcomes and enhance financial performance.
  
• Spire's regulatory engagement efforts in Missouri, including working towards a constructive resolution on the current rate case and improvements in the weather mitigation adjustment, aim to achieve a more stable and sustainable revenue environment.
  
• The expansion and optimization of Spire's Midstream segment, particularly the storage expansion project, have already started yielding better-than-expected returns, with higher rates and capacity utilization potentially leading to increased earnings.
  
• Labor market recovery in St. Louis and growth due to Boeing's new fighter aircraft project are anticipated to stimulate economic growth, potentially increasing demand for Spire's services and contributing to revenue growth.

Spire Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spire's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 11.2% in 3 years time.
• Analysts expect earnings to reach $327.5 million (and earnings per share of $5.32) by about May 2028, up from $237.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 19.1x today. This future PE is lower than the current PE for the US Gas Utilities industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 2.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Spire Future Earnings Per Share Growth

Risks

• The ineffectiveness of the weather mitigation mechanism impacted the Gas Utility segment’s earnings, leading to $9 million in lower margins for residential customers, which could affect future revenue predictability and net margins.
  
• The failure of the weather adjustment to align with customer usage resulted in financial discrepancies, suggesting potential risks to future earnings stability if not addressed in the regulatory proceedings.
  
• Spire's increased borrowing costs are raising corporate expenses, which might negatively influence net earnings if interest rates continue to rise or if debt grows to support capital expenditures.
  
• The substantial increase in capital expenditure, particularly the $50 million rise in fiscal 2025, could strain cash flow and financial flexibility, potentially pressuring net margins if expected returns on investment are not realized as planned.
  
• Regulatory uncertainties, particularly the pending outcome of the Missouri rate case and reliance on future rulemaking for implementing new rate-setting models, present risks to anticipated revenue and earnings growth if outcomes deviate from current assumptions and guidance.

Valuation

• The analysts have a consensus price target of $79.7 for Spire 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 $88.0, and the most bearish reporting a price target of just $69.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $327.5 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of $76.62, the analyst price target of $79.7 is 3.9% 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.