Operational Focus And Regulatory Progress Will Improve Future Outlook

Key Takeaways

• Separation of Centuri aims to streamline operations, enhance shareholder value, and boost earnings by focusing on pure-play utility operations.
  
• Regulatory advancements and population growth in key regions are expected to drive revenues and improve net margins through cost recovery and customer growth.
  
• Regulatory uncertainties and variable interest rate impacts could pressure net margins and earnings, with significant revenue growth dependent on economic conditions and demand increases.

Catalysts

Through its subsidiaries, engages in purchasing, distributing, and transporting natural gas in Arizona, Nevada, and California.

• Southwest Gas Holdings plans to complete the separation of Centuri, which could streamline operations and enhance shareholder value. This could positively impact future earnings by focusing on pure-play utility operations.
  
• The company's regulatory strategy in Nevada and progress in Arizona, including the anticipated approval of the System Integrity Mechanism (SIM), are expected to improve margins by enabling timely cost recovery and reducing regulatory lag, potentially boosting net margins.
  
• Strong economic activity in service territories and investments in infrastructure are expected to drive customer growth, supporting increased operating revenues. This is evidenced by significant planned capital expenditures of about $4.3 billion over the next five years to support rate base growth.
  
• The population growth in Arizona and Nevada, projected to outpace the national average, is expected to translate to more meter sets and customer growth, thereby increasing revenue and providing upside potential to earnings.
  
• Efforts to enhance operational efficiencies, including flat O&M costs per customer amid growing customer numbers, are expected to improve the utility's profitability and sustaining net income growth, thus improving net margins.

Southwest Gas Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southwest Gas Holdings's revenue will decrease by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $301.5 million (and earnings per share of $4.15) by about March 2028, up from $198.8 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 22.3x on those 2028 earnings, down from 26.2x today. This future PE is greater than the current PE for the US Gas Utilities industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.6%, as per the Simply Wall St company report.

Southwest Gas Holdings Future Earnings Per Share Growth

Risks

• The separation of Centuri is contingent on favorable market conditions, which adds uncertainty to the strategy and could impact the financial flexibility and potential rate of revenue growth.
  
• With interest expenses rising and regulatory balances shifting, there is a concern about how changes in interest rates and regulatory timing could pressure net margins and overall earnings.
  
• A significant portion of projected capital spending is contingent on demand growth. If economic activity or demographics shift, this could impact the financial projections related to rate base growth and earnings.
  
• The outcome of the regulatory mechanisms, including the pending System Integrity Mechanism (SIM) in Arizona, adds uncertainty to the potential improvement in net margins, as these mechanisms remain subject to approvals.
  
• There are risks associated with variable interest rate impacts and refinancing needs, which could increase financial obligations and impact net margins if not managed properly.

Valuation

• The analysts have a consensus price target of $77.143 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 2028, revenues will be $3.9 billion, earnings will come to $301.5 million, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $72.64, the analyst price target of $77.14 is 5.8% 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.