Iowa Settlement And Digital Expansion Set To Propel Utility's Long-Term Growth

Key Takeaways

• Implementing the Iowa rate review settlement ensures base rate stability, indicating a move towards predictable revenue streams and potential margin growth.
  
• Strategic focus on capital investments and operational excellence aims for consistent earnings growth, with initiatives like partnerships for renewable energy enhancing long-term prospects.
  
• Regulatory, operational, and financial challenges could impact Alliant Energy's earnings, margins, and investment in renewable projects if key growth targets are not met.

Catalysts

Operates as a utility holding company that provides regulated electricity and natural gas services in the United States.

• The Iowa rate review settlement offers base rate stability through the end of the decade, indicating predictable revenue streams and potential for higher net margins by minimizing regulatory uncertainty.
  
• Alliant Energy’s focus on capital investments to serve customer and community needs, alongside operational excellence driving efficiencies, supports a pathway to consistent earnings growth and improved net margins through cost controls.
  
• The settlement agreement in Iowa, providing the ability to attract economic development, including data centers, could lead to increased load growth. This presents a revenue growth opportunity, as new commercial and industrial customers are brought into the service territory.
  
• The execution of agreements with data centers in both Iowa and Wisconsin underlines a strategic move towards leveraging the growing digital economy to boost electricity demand, driving long-term revenue growth.
  
• Alliant Energy’s Clean Energy Blueprint and partnership with transmission companies (ATC and ITC Midwest) for new load interconnections could enhance long-term growth prospects. By strategically increasing renewable generation capacity and transmission interconnections, Alliant can meet growing demand, which may lead to margin improvements from economies of scale and a stronger competitive position in renewable energy.

Assumptions

• Analysts are assuming Alliant Energy's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.8% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $928.7 million (and earnings per share of $3.58) by about August 2027, up from $625.0 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 20.1x on those 2027 earnings, down from 23.6x today. This future PE is greater than the current PE for the US Electric Utilities industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 1.43% 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

• Implementation of the Iowa rate review settlement may result in lowered returns if Alliant Energy cannot achieve the expected economic development and load growth, impacting earnings growth.
  
• Regulatory challenges or changes, including potential disputes over advanced ratemaking principles or modifications in the coal combustion residual rule, could lead to increased operational costs or capital expenditure requirements, affecting net margins.
  
• Dependency on achieving specific load growth targets to support CapEx and operational plans, especially from new commercial and industrial customers, introduces risk if these targets are not met, potentially impacting revenue.
  
• The transition from serving two high-pressure steam customers by 2025 could imply a modest but direct impact on ongoing earnings if alternative revenue streams are not developed, influencing net margins.
  
• Execution of the 2024 financing plan is critical for funding investments in renewable and battery projects; any failure to secure anticipated funds could delay project timelines and increase costs, affecting earnings.

Valuation

• The analysts have a consensus price target of $58.93 for Alliant 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 $64.0, and the most bearish reporting a price target of just $52.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.9 billion, earnings will come to $928.7 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $57.54, the analyst's price target of $58.93 is 2.4% 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.