Data Center Expansion And Renewable Energy Investments Will Strengthen Future Prospects

Key Takeaways

• Expansion in renewable energy and data centers is set to boost WEC Energy's infrastructure and revenue growth.
  
• Strong economic growth and regulatory support suggest stable returns and potential for increased earnings per share.
  
• The ambitious capital plan risks cost overruns and delays, while reliance on infrastructure and renewables faces regulatory and economic uncertainties impacting financial performance.

Catalysts

Through its subsidiaries, provides regulated natural gas and electricity, and renewable and nonregulated renewable energy services in the United States.

• The expansion of data centers by companies such as Microsoft and Cloverleaf is set to drive incremental demand for WEC Energy's services, contributing to revenue growth over the next several years.
  
• The $28 billion 5-year capital plan that includes the development of 4,300 megawatts of renewable energy is anticipated to enhance the company's infrastructure and generation capacity, potentially leading to improved revenue and possibly net margins.
  
• The economic growth along the I-94 corridor, highlighted by significant investments from companies like Eli Lilly, supports increased demand for energy services, which is likely to bolster future revenue streams.
  
• The company's ability to maintain a 9.8% return on equity for Wisconsin utilities and the absence of planned rate cases suggest stable regulatory support, potentially leading to steady earnings.
  
• The announced increase in dividend payouts indicates confidence in future earnings growth, which could positively impact earnings per share.

WEC Energy Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WEC Energy Group's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.8% today to 19.0% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $5.99) by about March 2028, up from $1.5 billion 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 20.2x on those 2028 earnings, down from 22.4x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

WEC Energy Group Future Earnings Per Share Growth

Risks

• The large $28 billion 5-year capital plan, while ambitious, may expose the company to significant execution risks. If not managed carefully, these could lead to cost overruns and delays, impacting overall earnings.
  
• With projects like the Cloverleaf data center facing opposition from local constituencies, regulatory delays or changes could slow down anticipated growth and affect revenue forecasts.
  
• Reliance on large-scale infrastructure projects and economic growth in the region to drive demand and revenue might be challenged by macroeconomic factors such as a recession or reduced investment appetite, affecting future revenues.
  
• The company's significant investment in renewable energy projects, while strategic, relies heavily on uncertain regulatory environments and policy changes, which could impact returns and profit margins.
  
• Potential tariff implications and their effects on project costs, coupled with rising interest rates, could increase the cost of capital and pressure net margins, impacting overall financial performance.

Valuation

• The analysts have a consensus price target of $103.631 for WEC Energy Group 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 $115.0, and the most bearish reporting a price target of just $93.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.5 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $107.81, the analyst price target of $103.63 is 4.0% lower. 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.