Missouri Rate Increase Approval Could Improve Financial Performance By 2025

Key Takeaways

• Approval of rate increase and infrastructure surcharge enhances future earnings by improving revenue and financial performance.
  
• Long-term capital plan and growth in rate base support future revenue and earnings per share growth.
  
• Operational challenges from weather, regulatory pressures, and cost increases could impact Spire's margins and growth unless managed through strategic adaptations and rate adjustments.

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.

• The potential approval of the rate increase request with the Missouri Public Service Commission could increase Spire's revenues by $289.5 million, improving financial performance by October 2025.
  
• The 10-year capital expenditure plan of $7.4 billion primarily focused on utility spending and infrastructure modernization is expected to drive future rate base growth, positively impacting revenue growth.
  
• The successful implementation of the Infrastructure System Replacement Surcharge (ISRS) in Missouri will increase revenue to an annualized rate of $72.6 million, enhancing future earnings potential.
  
• Continued execution of the 7% to 8% rate base growth at Spire's largest utilities is expected to support long-term earnings per share (EPS) growth of 5% to 7%, positively impacting future earnings.
  
• The approved setup of the Rate Stabilization and Equalization mechanism in Alabama ensures cost recovery based on forecasted budget and supports consistent returns, which should stabilize net margins and facilitate steady future earnings growth.

Spire Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spire's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.3% today to 10.9% in 3 years time.
• Analysts expect earnings to reach $312.9 million (and earnings per share of $5.2) by about March 2028, up from $232.0 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 17.4x on those 2028 earnings, down from 19.2x today. This future PE is lower than the current PE for the US Gas Utilities industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Spire Future Earnings Per Share Growth

Risks

• There is ongoing uncertainty and risk inherent in regulatory approvals, such as the rate case with the Missouri Public Service Commission (PSC), which could impact anticipated future revenues if not approved as expected.
  
• Spire is susceptible to weather variability, which affected earnings in the first quarter as warmer-than-normal weather led to lower volumes in Missouri, potentially impacting revenue and earnings if such patterns persist.
  
• Inflationary pressures and increased costs associated with operations and capital investment could impact profit margins and limit earnings growth if not fully managed or recovered through rate adjustments.
  
• The financial performance of the Gas Marketing segment was negatively impacted by reduced market volatility and higher costs, which could continue to pressure earnings if these market conditions do not improve.
  
• The necessity for significant future capital investment of $7.4 billion over 10 years could lead to rising debt levels and interest expenses, thereby affecting net margins and earnings if not effectively aligned with revenue growth rates.

Valuation

• The analysts have a consensus price target of $74.5 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 $83.0, and the most bearish reporting a price target of just $67.0.
• 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 $312.9 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 6.7%.
• Given the current share price of $76.31, the analyst price target of $74.5 is 2.4% lower. 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.