Energizing The Future, Clean Power Growth Amid Economic And Market Optimism

Key Takeaways

• The advent of Plant Vogtle Units 3 and 4 and the uptick in electricity sales signal robust potential for revenue growth through clean energy and strong local economies.
  
• Favorable demographics and the approval for new resource procurement, including natural gas and battery storage, indicate long-term earnings growth and a commitment to shareholder returns.
  
• Exposure to operating costs or inefficiencies from Vogtle nuclear units, regulatory changes, dependence on Southeast economic growth, execution risk, and macroeconomic factors could affect earnings and net margins.

Catalysts

Through its subsidiaries, engages in the generation, transmission, and distribution of electricity.

• The completion and commercial operation of Plant Vogtle Units 3 and 4 introduce over 2,200 megawatts of reliable, carbon-free energy, which positions Southern Company to meet increasing demands for clean energy, impacting future revenue and earnings through new nuclear energy production.
  
• Higher than expected weather-adjusted electricity sales, particularly in the commercial customer class including data centers, reflect strong local economies and could lead to sustained higher revenues. This uptick in demand shows potential for continued top-line growth, especially if industrial recovery signs translate into steady improvements.
  
• A favorable business environment and net in-migration in the Southeast are contributing to customer growth, which could lead to increased consumption and higher revenue over the long term. This demographic and economic trend in Southern Company's service areas could provide a solid foundation for sustained growth.
  
• The Georgia Public Service Commission's approval for Georgia Power to procure several thousand megawatts of new resources to meet growing electricity demands signals potential capital expenditure that may enhance long-term earnings growth. This expansion includes natural gas combustion turbines and battery energy storage systems, which may result in improved service delivery and efficiency.
  
• Southern Company's dividend increase and consistent payout history reflect its financial strength and commitment to returning value to shareholders, implying confidence in its ability to grow earnings and maintain financial health amidst its investments and operational enhancements.

Assumptions

• Analysts are assuming Southern's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.7% today to 17.5% in 3 years time.
• Analysts expect earnings to reach $5.2 billion (and earnings per share of $4.59) by about July 2027, up from $4.2 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 19.9x on those 2027 earnings, down from 21.0x today. This future PE is greater than the current PE for the US Electric Utilities industry at 17.0x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

Risks

• The financial impact and potential risks associated with the new Vogtle nuclear units (Units 3 and 4) going into commercial operation could pose a risk if there are unforeseen operating costs or inefficiencies, affecting net margins.
  
• Regulatory and policy changes, hinted at with discussions around environmental rules and carbon emissions reduction goals, could lead to increased operational costs or capital expenditures impacting earnings.
  
• Dependence on economic growth within the Southeast region and the potential variability in customer growth rates could lead to earnings volatility. This is especially relevant if the expected rapid economic development and in-migration do not materialize as forecasted, affecting revenue.
  
• The execution risk in responding to the extraordinary growth and demand, particularly from data centers and large industrial customers, could strain Southern's resources or require additional capital, impacting financial performance.
  
• Potential risks associated with the macroeconomic environment, including higher interest expenses and the need for continuous capital investments in infrastructure to support growth, could pressure net margins and earnings if not managed effectively.

Valuation

• The analysts have a consensus price target of $77.98 for Southern 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 $85.5, and the most bearish reporting a price target of just $69.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $29.5 billion, earnings will come to $5.2 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of $81.63, the analyst's price target of $77.98 is 4.7% 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.