Modernization And Regulatory Strategies Will Increase Operational Efficiency In Gas Utilities

Key Takeaways

• Spire's infrastructure modernization and regulatory strategies aim to boost revenue, earnings, and rate base growth in their core utility operations.
  
• Advanced metering technology and strategic cost management initiatives aim to improve operational efficiencies and net margins amidst inflationary pressures.
  
• Spire's financial outlook is challenged by weak market conditions, regulatory risks, significant capital expenses, and weather-related revenue 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 $7.4 billion 10-year capital expenditure plan focuses heavily on gas utility infrastructure modernization, which is expected to drive 7% to 8% rate base growth at their largest utility, Spire Missouri. This should have a positive impact on future revenues and earnings.
  
• The implementation of advanced metering technology, with 350,000 meters installed in fiscal 2024, aims to improve operational efficiencies and reduce operational and maintenance (O&M) expenses, possibly enhancing net margins.
  
• A forthcoming regulatory rate case in Missouri seeks to update cost of service and rate base, potentially leading to better cost recovery and improved return on equity (ROE) in fiscal 2026. Successful regulatory outcomes can positively influence future revenues and earnings.
  
• Strategic cost management initiatives, including a customer affordability initiative, aim to maintain flat O&M expenses in fiscal 2025, potentially supporting better net margins by offsetting inflationary pressures.
  
• Spire's Midstream segment, projected to grow earnings due to the full-year benefit of storage expansion and pipeline acquisitions, is anticipated to enhance earnings stability and diversify revenue sources away from volatile gas marketing segments.

Spire Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spire's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 10.7% in 3 years time.
• Analysts expect earnings to reach $307.0 million (and earnings per share of $5.08) by about December 2027, up from $235.8 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 16.7x on those 2027 earnings, which is the same as it is today today. This future PE is lower than the current PE for the US Gas Utilities industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 1.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

Spire Future Earnings Per Share Growth

Risks

• Spire's fourth-quarter results fell below expectations due to weak natural gas market conditions and higher corporate expenses, which could negatively impact earnings and financial performance in the future.
  
• The anticipated improvements in earned returns in Missouri depend on achieving a reasonable outcome in rate cases, which carries regulatory risk that could affect revenue recovery and earnings.
  
• Interest rate uncertainties and assumptions of multiple rate cuts could impact Spire's cost of capital and financial outlook if rates do not decline as expected, affecting net margins and profitability.
  
• The company's heavy investment in infrastructure, while intended for growth, results in significant capital expenditures that may not yield desired return rates if market conditions or regulatory approvals do not align with projections.
  
• Potential fluctuations in weather can significantly impact revenues, with current assumptions of normalized weather in guidance creating financial risk if actual weather varies significantly from these expectations.

Valuation

• The analysts have a consensus price target of $70.59 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 $80.0, and the most bearish reporting a price target of just $60.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.9 billion, earnings will come to $307.0 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 6.5%.
• Given the current share price of $68.3, the analyst's price target of $70.59 is 3.2% 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.