Energizing Growth, Tactical Investments And Renewable Initiatives Propel Earnings And Attract Investors

Key Takeaways

• WEC Energy Group's growth is bolstered by strong regional economic activities and significant development projects, indicating increased demand for energy services.
  
• The company's strategic investments in efficiency, sustainability, and safety, along with a commitment to returning value to shareholders, position it for potential earnings growth and attractiveness to investors.
  
• Regulatory uncertainties and reliance on major projects introduce financial and operational risks, affecting revenue, margins, and capital allocation.

Catalysts

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

• The ongoing strong foundational growth in the regional economy, highlighted by low unemployment rates and significant economic activities such as infrastructure and facility expansions by major corporations like WestRock and Microsoft, suggests that WEC Energy Group is poised for solid growth in demand for its services. This could positively impact revenue as more businesses and consumers consume energy.
  
• Microsoft's planned investment of $3.3 billion in cloud computing and AI infrastructure in Southeast Wisconsin is expected to bring thousands of jobs to the area, indicating a significant increase in energy demand that could boost WEC Energy Group's revenue, as the company will likely be a primary energy supplier for these new developments.
  
• The company's largest ever 5-year investment plan totaling $23.7 billion aimed at efficiency, sustainability, and growth, supported by projects that are low-risk and highly executable, positions WEC Energy Group for potential earnings growth. The capital investments in natural gas generation and solar energy centers specifically could lead to higher net margins due to increased efficiency and reliance on renewable energy sources.
  
• WEC Energy Group's appeal to the Illinois Commerce Commission decision on the Safety Modernization program, requesting the restoration of $145 million for 2024, suggests proactive regulatory engagement to protect its investments and earnings potential. Successful appeals could positively affect net margins by enabling the company to recover costs associated with safety and infrastructure improvements.
  
• The company's target payout ratio of 65% to 70% of earnings and its plan to align dividend growth with earnings per share growth indicate a strong commitment to returning value to shareholders. This approach could make the stock more attractive to investors, supporting its value based on anticipated earnings growth and resulting in a potentially undervalued stock based on its dividend yield and growth prospects.

Assumptions

• Analysts are assuming WEC Energy Group's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 18.2% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $5.77) by about August 2027, up from $1.4 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 17.8x on those 2027 earnings, down from 20.6x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• Regulatory uncertainties and potential unfavorable outcomes from ongoing reviews and dockets in Illinois, particularly pertaining to the Safety Modernization program and the future of natural gas, could lead to financial implications, impacting revenue and capital allocation decisions.
  
• Relying heavily on major projects for growth, such as infrastructure developments tied to the Microsoft investment, introduces execution risk. Delays or increased costs could affect expected revenues and margins.
  
• The appeal process for regulatory decisions in Illinois, with an expectation of resolution taking a year or more, introduces a risk of prolonged uncertainty and potential for unfavorable financial outcomes.
  
• The significant planned capital expenditure for efficiency, sustainability, and growth projects necessitates successful regulatory approval and may involve funding and liquidity risks, impacting net margins and earnings if there are delays or increased costs.
  
• Operational risks, such as the impact of weather on project timelines (e.g., the Delilah I Solar project delay), could lead to deferred revenues and increased costs, negatively affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $89.23 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 $98.0, and the most bearish reporting a price target of just $79.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $10.3 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $88.95, the analyst's price target of $89.23 is 0.3% 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.