Grid Modernization Investments Will Boost Operational Efficiency In The Future

Key Takeaways

• Customer-focused investments in grid modernization and energy projects are expected to drive significant earnings growth and efficiency gains.
  
• Transition plans away from coal and adopting sustainable practices could enhance public perception and customer base, supporting revenue growth and regulatory backing.
  
• Regulatory hurdles, funding dependencies, and external factors threaten TXNM Energy's growth, with potential impacts on earnings stability and long-term revenue.

Catalysts

Through its subsidiaries, provides electricity and electric services in the United States.

• TXNM Energy is targeting 6% to 7% earnings growth through 2028, supported by customer-focused investments in grid modernization and energy projects in New Mexico and Texas. This could positively impact earnings as these investments materialize and contribute to efficiency and revenue generation.
  
• The company expects a 2% to 3% growth in traditional volumetric and demand-based rate classes in 2024 due to increased residential customer counts and interconnection requests in its service territory, signaling potential revenue growth.
  
• The company's involvement in significant projects like the $600 million TNMP system resiliency plan and the $900 million ERCOT projects planned to begin in 2027 could provide substantial opportunity for future capital investment recovery, thereby positively impacting net margins and earnings.
  
• PNM's recently approved Grid Modernization Plan and participation in the Department of Energy's virtual power plant project aim to enhance grid stability and customer benefits, potentially leading to increased operational efficiency and improved net margins.
  
• TXNM Energy's plans to issue RFPs for new resources and transition away from coal by 2031 align with long-term sustainability goals, which could increase customer base and revenue while contributing positively to public perception and regulatory support.

TXNM Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TXNM Energy's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $326.3 million (and earnings per share of $3.31) by about December 2027, up from $176.2 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 18.1x on those 2027 earnings, down from 24.8x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 2.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

TXNM Energy Future Earnings Per Share Growth

Risks

• The potential for regulatory delays or disputes, such as those related to ERCOT's project allocations, could slow down anticipated growth and capital recovery, impacting future earnings forecasts.
  
• There is uncertainty around the outcomes of rate cases in New Mexico and Texas, which could affect revenue stability and earnings if settlements or rate approvals don't align with the company's plans.
  
• The substantial equity issuance required to finance capital investments, particularly for the expansion in Texas, could dilute earnings per share, putting pressure on net margins.
  
• Dependence on DOE funding for projects that ensure energy transition and grid resilience creates a variable that could disrupt project timelines and funding if not received, impacting long-term revenue growth.
  
• The effects of uncontrollable factors such as weather conditions negatively impacting net earnings further highlight the company's vulnerability to external conditions, which could lead to earnings variability.

Valuation

• The analysts have a consensus price target of $50.85 for TXNM Energy 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 $53.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.5 billion, earnings will come to $326.3 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $48.44, the analyst's price target of $50.85 is 4.7% 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.