Centuri Separation And Rate Cases Set To Improve Future Prospects

Key Takeaways

• Favorable rate cases and strategic separation are expected to boost revenue and enhance earnings positively.
  
• Strong customer growth and strategic investments support increased demand, improve performance, and bolster net margins without new equity issuance.
  
• Uncertainties in economic conditions, regulatory approvals, and operational issues could impact earnings, revenue, and financial performance negatively.

Catalysts

Through its subsidiaries, distributes and transports natural gas in Arizona, Nevada, and California.

• The completion of the general rate case in Nevada and favorable outcomes in Arizona and California are expected to increase revenue through approved rate increases and enhanced rate base, positively impacting net income growth.
  
• The separation of Centuri and the appointment of a new CEO may unlock strategic opportunities and improve operational focus, potentially influencing earnings positively.
  
• Strong customer growth, bolstered by economic activity in service territories and large projects like TSMC and potential data centers, is likely to drive revenue growth through increased meter sets and residential and commercial demand.
  
• Strategic capital investments to improve system safety, reliability, and meet customer demand aim to enhance operational performance and future cost management, potentially improving net margins.
  
• No anticipated equity issuance in 2024 due to strong liquidity and successful refinancing efforts may contribute to a more favorable earnings outlook.

Southwest Gas Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southwest Gas Holdings's revenue will decrease by -11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $315.4 million (and earnings per share of $4.48) by about December 2027, up from $179.2 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 20.6x on those 2027 earnings, down from 28.4x today. This future PE is greater than the current PE for the US Gas Utilities industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.29%, as per the Simply Wall St company report.

Southwest Gas Holdings Future Earnings Per Share Growth

Risks

• Uncertainties surrounding future economic conditions and regulatory approvals may impact earnings forecasts and net income growth.
  
• Timelines and outcomes of rate cases in Arizona and California remain uncertain, potentially impacting revenue and net margins.
  
• The plan to separate Centuri depends on market conditions, which introduces uncertainty related to future earnings and revenue from this segment.
  
• Centuri's lower performance due to unforeseen operational issues and higher costs could negatively affect overall earnings.
  
• Higher interest expenses at the holding company level may impact net income and overall financial performance.

Valuation

• The analysts have a consensus price target of $77.4 for Southwest Gas Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $315.4 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 6.3%.
• Given the current share price of $70.83, the analyst's price target of $77.4 is 8.5% 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.