Major Infrastructure And Renewable Projects Will Ensure Stability

Key Takeaways

• Strategic investments in renewable energy and infrastructure are set to enhance revenue, earnings stability, and improve margins.
  
• The VLC tariff proposal seeks to boost revenue by attracting large customers without compromising margins.
  
• WEC Energy Group's reliance on macroeconomic conditions, tariffs, regulatory changes, and execution risks could negatively impact revenue, profitability, and project outcomes.

Catalysts

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

• WEC Energy Group is leveraging the strong economic growth in its region, with significant projects like Microsoft's data center and Eli Lilly's expansion, which are expected to drive electric demand and increase revenue.
  
• The company is undertaking a $28 billion capital plan, the largest in its history, focused on economic growth and reliability, which should lead to revenue growth and greater earnings stability.
  
• The new VLC tariff proposal aims to attract very large customers like data centers with favorable terms while preventing cost shifting to other customers, potentially increasing revenue without significantly impacting margins.
  
• Investments in solar and renewable projects, such as the Darien Solar project and future projects in Wisconsin, are set to enhance the clean energy portfolio, thus impacting net margins positively through production tax credits and regulatory incentives.
  
• The pipeline safety modernization program in Illinois, with expenditures ramping up to over $500 million annually, is expected to increase rate-base growth and earnings, driven by recovery in future rate cases.

WEC Energy Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WEC Energy Group's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.0% today to 19.2% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $6.11) by about May 2028, up from $1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, down from 21.5x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 21.4x.
• Analysts expect the number of shares outstanding to grow by 0.75% 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

• WEC Energy Group's capital plan is highly dependent on macroeconomic conditions, such as economic growth and inflation rates. If these conditions worsen, it could negatively impact revenue projections and returns on their capital investment.
  
• The company faces tariff exposure in their supply chain estimated at 2% to 3%. Potential tariff increases could raise costs and affect supply chain efficiency, impacting net margins and overall profitability.
  
• Regulatory changes and challenges, including pipeline safety modernization programs in Illinois, may result in increased operational expenses and could limit the pace of capital deployment, affecting earnings.
  
• The IRS transferability or repeal of tax credits under the Inflation Reduction Act could increase project costs or decrease profitability through diminished project economics and tax efficiency, impacting cash flows and net earnings.
  
• The dependence on large-scale projects and the timing of their completions, such as data centers and renewable energy projects, carry execution risks. Delays or cost overruns could impact future revenue and expected growth rates.

Valuation

• The analysts have a consensus price target of $105.394 for WEC Energy Group 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 $10.6 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 $109.76, the analyst price target of $105.39 is 4.1% 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.