Planned Gas Capacity Additions In Texas Will Meet Rising Energy Demand

Key Takeaways

• Strategic acquisitions and power purchase agreements may enhance revenue streams and improve earnings with scale, efficiency, and regulatory support.
  
• Investments in renewable and gas capacity are expected to boost revenues, margins, and operational flexibility through cleaner, cheaper fuel sources.
  
• Regulatory and legislative uncertainties across markets could delay new projects, impact revenue from auctions, and affect profitability due to unforeseen expenses.

Catalysts

Operates as an integrated retail electricity and power generation company in the United States.

• The acquisition of three new nuclear sites and 1 million retail customers could lead to enhanced revenue streams and improved earnings through scale and integration into Vistra’s existing operations.
  
• The addition and extension of power purchase agreements for their renewable pipeline can provide a steady revenue source while potentially improving net margins due to higher efficiency and regulatory incentives for renewable energy.
  
• The planned capacity additions of approximately 500 megawatts in existing gas assets in Texas is expected to efficiently meet rising demand, potentially boosting both revenues and net margins.
  
• The conversion of the Coleto Creek coal plant to gas and the extension of Baldwin's operations will enhance operational flexibility and potentially improve net margins due to a shift to cheaper, cleaner fuel.
  
• The construction of solar and battery projects at existing sites can lead to a diversified revenue stream and higher earnings, aligned with long-term renewable energy trends.

Vistra Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vistra's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.3% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $3.0 billion (and earnings per share of $9.39) by about March 2028, up from $2.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.6 billion in earnings, and the most bearish expecting $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from 15.7x today. This future PE is greater than the current PE for the US Renewable Energy industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 2.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

Vistra Future Earnings Per Share Growth

Risks

• Uncertainties around the approval of 2026-2027 PJM auction parameters and necessary final hedging activities could lead to earnings variability, impacting potential revenue from future capacity auctions and hedging strategies.
  
• Regulatory and legislative uncertainties in both PJM and ERCOT regarding market design, as well as constraints on colocation with existing generation assets, could delay new projects and influence long-term revenue growth.
  
• Concerns about potential regulatory hurdles and lack of clarity on insurance recoveries following the Moss Landing fire could result in unforeseen expenses affecting net margins and operational profitability.
  
• Legislative discussions in Texas, particularly related to grid reliability and disconnections, might influence data center customer decisions, potentially impacting revenues from large industrial power purchase agreements.
  
• Ongoing debates about transmission charges and regulatory approval processes for colocated deals could delay project timelines, affecting anticipated revenue inflows from planned growth initiatives in the nuclear and gas sectors.

Valuation

• The analysts have a consensus price target of $173.05 for Vistra 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 $231.0, and the most bearish reporting a price target of just $52.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.6 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $114.32, the analyst price target of $173.05 is 33.9% higher.
  
• 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.