Elevating Clean Energy, A Leap Towards Revenue Growth And Operational Efficiency

Key Takeaways

• Eversource Energy's shift to a pure-play regulated utility by selling certain projects aims to stabilize its financial outlook and foster core operational growth.
  
• Investments in grid reliability, electric distribution for electrification, and clean energy initiatives are expected to drive revenue growth and improve financial stability.
  
• Eversource Energy's financial performance is at risk due to significant capital investments, regulatory challenges, higher O&M expenses, reliance on rate approvals, and execution risks tied to a major transmission project.

Catalysts

A public utility holding company, engages in the energy delivery business.

• Closing the sale of their offshore wind project to Orsted and the anticipated sale of South Fork and Revolution Wind projects focuses Eversource Energy on being a pure-play regulated utility, which is expected to stabilize its financial outlook and foster growth in its core operations, potentially affecting its revenue and net margin positively.
  
• Eversource's nearly $6 billion investment in transmission over the next 5 years, aimed at enhancing grid reliability and meeting electrification demand, is likely to drive revenue growth through increased capital cost recovery from customers.
  
• The company's significant investment in electric distribution to support the electrification of transport and heating in Massachusetts, if successful, could lead to higher demand for its services, increasing its revenue and improving its financial stability.
  
• Implementation of a new customer billing and information system under the Massachusetts AMI program is expected to improve operational efficiency, potentially lowering operational costs and positively affecting net margins.
  
• Eversource's focus on clean energy initiatives, including the network geothermal pilot in Massachusetts and the facilitation of electric vehicle charging in Connecticut, positions it to benefit from regulatory support and incentives, potentially leading to revenue growth and improved net margins due to cost recovery mechanisms and incentives for clean energy initiatives.

Assumptions

• Analysts are assuming Eversource Energy's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.8% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $5.26) by about September 2027, up from $-91.6 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 17.2x on those 2027 earnings, up from -262.9x today. This future PE is lower than the current PE for the US Electric Utilities industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 2.38% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.91%, as per the Simply Wall St company report.

Risks

• The significant capital investments required to update and expand the electric and transmission systems to meet increasing demand and achieve greenhouse gas reduction goals could lead to higher debt levels or require additional equity issuance, potentially diluting current shareholders and impacting net income.
  
• Regulatory challenges or delays in obtaining approval for cost recovery mechanisms could impact cash flow and delay the realization of earnings from capital investments, affecting overall financial performance.
  
• The risk of higher operation and maintenance (O&M) expenses, driven by storm restoration costs and investments in aging infrastructure, could reduce net margins if these costs are not fully recoverable through rate adjustments.
  
• Dependence on regulatory approval for rate increases, including the significant rate base reset in Massachusetts, poses a risk to revenue if proposed increases are not fully approved, impacting the company's ability to recover costs and achieve projected earnings growth.
  
• Exposure to the execution and completion risks associated with the company's largest ever $6 billion transmission investment program, including potential cost overruns and delays that could impact Eversource Energy's ability to meet its greenhouse gas reduction targets and financial objectives, thus affecting earnings.

Valuation

• The analysts have a consensus price target of $72.84 for Eversource Energy 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 $94.0, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.2 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of $67.4, the analyst's price target of $72.84 is 7.5% 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.