Pennsylvania Gas Rate Boost And Tactical Expansion Signal Promising Revenue Growth

Key Takeaways

• Stabilization of revenues through a gas rate case and strategic infrastructure investments aim to enhance future revenue and earnings.
  
• Asset purchases and expansion in growth regions aim to drive customer base growth and organic revenue increases.
  
• Legal and regulatory challenges, inflation, and financial uncertainty may impact Essential Utilities' revenue growth, net margins, EPS, and shareholder value.

Catalysts

Through its subsidiaries, operates regulated utilities that provide water, wastewater, or natural gas services in the United States.

• The approval of a Pennsylvania gas rate case, including a weather normalization mechanism, is expected to stabilize future revenues by mitigating the financial volatility caused by unusual weather conditions, leading to potential revenue and earnings growth.
  
• Essential Utilities has a significant capital investment plan of $7.8 billion through 2029 for infrastructure improvements in water, wastewater, and natural gas, anticipating a compound annual growth rate of over 8% in rate base, which should positively impact revenue and earnings.
  
• The reinstatement of multiyear EPS guidance with a projected growth rate of 5% to 7% through 2027 indicates confidence in consistent earnings growth, driven by rate base growth and infrastructure investment plans.
  
• The company has several signed asset purchase agreements expected to add significant new customer numbers and rate base, potentially increasing revenue and contributing to long-term earnings growth as these acquisitions integrate.
  
• Essential Utilities' focus on operational excellence, efficiency, and customer base expansion, particularly in rapidly growing regions such as Texas and North Carolina, is expected to drive organic growth, increasing potential revenue and earnings over time.

Essential Utilities Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Essential Utilities's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.8% today to 25.1% in 3 years time.
• Analysts expect earnings to reach $683.7 million (and earnings per share of $2.35) by about November 2027, up from $546.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2027 earnings, up from 19.6x today. This future PE is lower than the current PE for the US Water Utilities industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 1.93% 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.

Essential Utilities Future Earnings Per Share Growth

Risks

• The ongoing petition for review of the Pennsylvania gas rate case by the Office of the Consumer Advocate could introduce legal and regulatory challenges, potentially impacting uncertain revenue projections from the approved rate increase.
  
• The company's exclusion of any earnings associated with DELCORA from their guidance indicates uncertainty around the transaction, which could lead to missed growth projections affecting earnings and cash flow assumptions.
  
• Elevated inflation, coupled with higher interest rates and unusually warm weather impacts in the natural gas territory, could squeeze net margins by increasing operational costs and undermining consumer pricing models.
  
• Required equity raises totaling $350 million through 2025 could dilute current shareholders and potentially impact share price negatively, affecting earnings per share (EPS) if not met with sufficient returns from the corresponding investments.
  
• Legal and regulatory adaptability may be challenged by structural changes in demographics or market regulations, particularly in the competitive Texas and North Carolina markets, which could constrain anticipated revenue growth avenues.

Valuation

• The analysts have a consensus price target of $45.8 for Essential Utilities 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 $60.0, and the most bearish reporting a price target of just $41.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $683.7 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $38.95, the analyst's price target of $45.8 is 15.0% 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.