Investing In Renewable Resources And Innovative Energy Models

Key Takeaways

• Investment in energy infrastructure and a move towards renewable resources supports future revenue growth and operational efficiencies.
  
• Focusing on innovative energy procurement models for powering hyperscale data centers and blockchain growth projects significant earnings opportunities.
  
• Financial stability faces threats from unplanned outages, regulatory hurdles, and weather reliance, alongside risks from large project executions and capital investment needs.

Catalysts

Through its subsidiaries, operates as an electric and natural gas utility company in the United States.

• The ongoing $800 million capital investment plan, including the Ready Wyoming electric transmission project, supports future revenue growth by enhancing energy infrastructure and promising cost stability for customers.
  
• Active regulatory plan and the expected cadence of 3 to 4 rate reviews per year aim to improve recovery of investments and reduce lag, positively impacting net margins.
  
• The move towards renewable resources, with plans for 400 megawatts of new renewable resources in Colorado and 100 megawatts in South Dakota, targets revenue growth through increased generation capacity and operational efficiencies.
  
• Hyperscale data center and blockchain growth, exemplified by powering Meta's new Cheyenne data center, presents a significant earnings growth opportunity, projecting to exceed 10% of total EPS by 2028, through innovative energy procurement models.
  
• The $1.3 billion capital investment in 2026, including generation investments from electric resource plans, along with anticipated incremental opportunities in subsequent years, underlines a robust strategy for long-term earnings and revenue growth.

Assumptions

• Analysts are assuming Black Hills's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $350.9 million (and earnings per share of $4.52) by about September 2027, up from $275.7 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 17.1x on those 2027 earnings, up from 15.1x today. This future PE is lower than the current PE for the US Integrated Utilities industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 3.93% 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

• The impact of unplanned generation outages on revenue, highlighted by the inability to meet energy demand efficiently, could lead to increased operational costs or penalties that dent net margins.
  
• The ongoing need for capital investment, detailed in the $800 million plan for 2024 and the average of more than $800 million per year in the subsequent period, may lead to increased debt levels or equity issuances that could dilute earnings per share.
  
• Regulatory challenges related to rate reviews and the need for approval of new rates, as discussed for Colorado Electric and other rate reviews, pose a risk to timely recovery of investments, potentially impacting cash flow and profit margins.
  
• The reliance on weather conditions for energy demand, noted through the discussion of weather's negative impact on EPS, may lead to revenue volatility, affecting overall financial stability and predictability of earnings.
  
• Risks associated with the execution and delivery of large infrastructure projects, such as the Ready Wyoming transmission project and utility-owned generation projects, could lead to cost overruns or delays, impacting return on investment and net income.

Valuation

• The analysts have a consensus price target of $64.8 for Black Hills 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 $77.0, and the most bearish reporting a price target of just $57.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.6 billion, earnings will come to $350.9 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 5.8%.
• Given the current share price of $59.66, the analyst's price target of $64.8 is 7.9% 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.