Renewable Investments Will Quadruple Carbon-Free Energy Generation

Key Takeaways

• Major investments in renewable energy and infrastructure are expected to drive significant growth in earnings and enhance energy reliability.
  
• Expanding transmission and commercial projects support increased demand, potentially boosting revenue and contributing to economic growth.
  
• Regulatory challenges, growing expenses, and reliance on economic developments may impact profitability, margins, and revenue growth leading to potential financial instability.

Catalysts

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

• The significant investment of $28 billion in the capital plan from 2025 through 2029, aimed at increasing regulated electric generation, transmission, and distribution, is expected to drive strong asset-based growth and support earnings per share growth of 6.5% to 7% annually. This will likely impact earnings positively as the investments come online.
  
• The planned addition of 4,400 megawatts of renewable energy, including solar, wind, and battery storage, will quadruple carbon-free generation, leading to fuel cost savings and tax credits that could boost net margins.
  
• Specific major projects, such as Microsoft's data center development and other commercial expansions in Wisconsin, can increase energy demand, positively influencing revenue growth as the utility meets higher customer energy requirements.
  
• Investments in natural gas generation and liquefied natural gas capacity to enhance system reliability and meet customer demand are positioned to ensure stable and efficient energy supply, potentially supporting revenue and margins due to reduced risk of system unreliability.
  
• Continued capital investment in transmission, such as the $3.2 billion expenditure from 2025 to 2029 to support regional economic growth, indicates potential enhancements in earnings as transmission capabilities expand to meet increasing energy demands.

WEC Energy Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WEC Energy Group's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.1% today to 18.7% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $5.91) by about December 2027, up from $1.3 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 2027 earnings, down from 23.2x today. This future PE is greater than the current PE for the US Integrated Utilities industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 1.58% 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.

WEC Energy Group Future Earnings Per Share Growth

Risks

• Regulatory challenges, such as the Illinois rate design change and the disallowance of certain capital expenditures, result in decreased earnings, potentially impacting net margins and revenues.
  
• Increased operational and maintenance expenses, along with higher depreciation and amortization, present risks to net margins by increasing overall costs.
  
• The significant increase in capital expenditure may require substantial equity and debt financing, potentially diluting earnings per share and impacting net margins.
  
• Dependence on economic developments, such as those with Microsoft and Amazon, creates risks if these projects do not progress as anticipated, which could affect expected revenue growth.
  
• Exposure to regulatory developments, like the future of natural gas in Illinois and ongoing rate cases, could lead to unforeseen costs and liabilities, impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of $100.72 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 $112.0, and the most bearish reporting a price target of just $86.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, 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 5.9%.
• Given the current share price of $94.71, the analyst's price target of $100.72 is 6.0% 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.