Energizing The Future, SCE's Decisive Investments Ignite Revenue Growth And Sustainability Triumphs

Key Takeaways

• Substantial investments in electric infrastructure and clean energy position the company for revenue growth by meeting rising electricity demand and sustainability goals.
  
• Strategic cost management and wildfire risk mitigation improve the financial and operational risk profile, potentially enhancing customer loyalty and net margins.
  
• Edison International faces challenges including regulatory uncertainties, unforeseen costs, wildfire liabilities, and competitive pressures that may impact revenue, net margins, and overall financial health.

Catalysts

Through its subsidiaries, engages in the generation and distribution of electric power.

• Load growth trends materializing sooner than expected indicate significant CapEx opportunities, implying potential revenue growth from increased utility services demand.
  
• Forecasting system average rate increases closely aligned with inflation suggests a strategic management of costs that could enhance customer affordability and loyalty, potentially leading to stable or increasing revenue.
  
• Substantial investments in the electric system are expected to drive rate base growth, directly impacting revenue and earnings positively by meeting the voracious demand for electricity.
  
• Improved operational and financial risk profiles, with wildfire risk mitigation highlighting reduced operational risks and potential for lower insurance costs, which can enhance net margins by reducing expenses.
  
• Commitment to sustainability and leading the charge towards a carbon-neutral California with investments in clean energy and grid readiness could attract green investments and subsidies, boosting revenue growth and potentially improving net margins through efficient energy solutions.

Assumptions

• Analysts are assuming Edison International's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $6.1) by about September 2027, up from $961.0 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 17.0x on those 2027 earnings, down from 34.8x 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 0.75% 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

• SCE's confidence in achieving regulatory outcomes that align with requested increases in its General Rate Case (GRC) may not materialize as anticipated, impacting revenue and earnings if actual outcomes are less favorable.
  
• The company's forecast of keeping system average rate increases closely aligned with inflation levels could be challenged by unforeseen costs or lower-than-expected rate approvals by the CPUC, affecting net margins.
  
• Larger-than-anticipated investments required to meet burgeoning load growth and maintain grid reliability could strain capital resources more than planned, potentially impacting earnings if financing costs rise or if additional equity is required beyond projections.
  
• SCE's wildfire mitigation efforts, while substantial, still carry the risk of not being sufficient to prevent future wildfire liabilities, which could significantly impact net margins through increased costs or liabilities not covered by insurance or rate recovery mechanisms.
  
• The assumption that SCE will maintain the lowest system average rate among California IOUs may be threatened by unexpected increases in operational costs or capital expenditure requirements, potentially affecting competitive positioning and earnings.

Valuation

• The analysts have a consensus price target of $87.04 for Edison International 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 $94.89, and the most bearish reporting a price target of just $68.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $19.5 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 5.8%.
• Given the current share price of $86.65, the analyst's price target of $87.04 is 0.4% 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.