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home / news releases / ETR - Entergy Corporation: Adjusted EPS Growth Expected


ETR - Entergy Corporation: Adjusted EPS Growth Expected

2023-11-07 21:41:56 ET

Summary

  • Entergy reported fairly strong earnings for the third quarter, given higher temperatures.
  • Management expects more adjusted earnings per share growth in the next few years given more investments.
  • Entergy Corporation trades for a fairly attractive valuation. With the expected EPS growth ahead, the stock is a 'Buy'.

Entergy Corporation ( ETR ) is a regulated utility that provides electricity to 3 million customers across Arkansas, Louisiana, Mississippi, and Texas. The company also provides natural gas to 204,000 customers across those states.

While Entergy offers natural gas, electricity accounts for the vast majority of the company's revenues. In 2022, electricity accounted for $13.187 billion in sales, natural gas accounted for $233.92 million, and competitive businesses accounted for $343.472 billion.

It also remains to be seen how much longer Entergy will have its gas business as the company agreed in October 2023 to sell its gas distribution business to Bernhard Capital for $484 million in cash. The deal will require the approval of regulators, however, which could take some time.

In terms of its stock performance, Entergy shares fell given the onset of the pandemic in early 2020 and the stock has not recovered to their former levels with higher U.S. Treasury yields in the past few years as one headwind.

Data by YCharts

In terms of adjusted earnings per share, however, the company earned $5.66 in 2020, $6.02 in 2021, and $6.42 in 2022. Management also anticipates more adjusted EPS growth in the next few years.

So while Entergy's stock hasn't done well since 2020, its adjusted earnings have nevertheless increased.

Recently, Entergy reported its third quarter earnings.

Third Quarter 2023

For Q3 2023, Entergy earned an adjusted EPS of $3.27 as record temperatures had an estimated impact of $0.64 per share.

Given the heat and subsequent demand for cooling, Entergy saw record demand through July and August. According to the company there were 13 days that surpassed previous peak demand records.

As a result, Entergy used the extra income to "flex our spending plans to invest in key areas that benefit our customers, derisk 2024 and support our goal to deliver steady predictable results".

I think as global warming continues, the record temperatures this summer could continue in the summers of coming years as well. This likely means more demand in the summer quarter from cooling needs for hotter temperatures. More demand could continue to help the company's earnings in the summer months.

With that said, warmer temperatures could lower demand for electricity during the winter, although by how much is still unknown given Entergy operates in the South and many customers use natural gas rather than electric.

As a result of Q3 and the weather impact, management narrowed the 2023 adjusted EPS guidance, raising the bottom of the range by 10 cents. In terms of 2023 adjusted EPS guidance, management previously guided for $6.55-$6.85. Now it is $6.65-$6.85.

Management also continues to expect adjusted EPS to grow in the next few years, with a 2024 estimated outlook of $7.05-$7.35 , 2025 outlook of $7.50-$7.90, and 2026 guidance of $8.05-$8.45. The 2024 estimated outlook is presumably more likely given management has moved some spending around this quarter as a result of the weather impact.

For the future, Entergy benefits from customer growth, the clean energy transition, investing for reliability and resilience and other potential customer centric investment needs.

Entergy Investor Presentation

The company's System Energy Resources business, otherwise known as SERI, also reached a $142 million global settlement in principle with the Arkansas Public Service Commission to resolve all current SERI claims, subject to FERC approval that removes some uncertainty.

According to management , "with this latest settlement, SERI has now resolved nearly two-thirds of its litigation risk." SERI has experienced litigation risk given a uncertain tax position issue .

Factors That Affect Earnings

Just whether management will achieve its earnings outlook will depend on various conditions, some of which are not in management's control such as weather and interest rates.

Entergy Investor Presentation

Given global warming, the impact of weather on adjusted EPS could be more pronounced. As a result, I think the company's adjusted EPS volatility could be larger on a quarter to quarter basis. While Entergy benefited from weather this quarter, weather and extreme weather events such could be a headwind in other quarters.

A potential recession or economic slowdown could also lower demand especially in relation to the utility's industrial customers, which could also be a headwind for earnings.

Nevertheless in the medium term, there is reason to be optimistic on rate base increases as Entergy adds more renewable energy and modernizes its grid to handle renewable energy inputs.

Dividend and Balance Sheet

Entergy has a pretty solid balance sheet with a 'BBB+ (stable)' rating from S&P and 'Baa2 (negative)' rating from Moody's, which are both investment grade debt .

The company also has a pretty solid dividend history as it has raised its dividend for eight consecutive years .

Data by YCharts

In Q3 2023, Entergy raised its quarterly dividend by 6% to $1.13 per share, or $4.52 annually. In 2023, the company is expected to earn an adjusted $6.65-$6.85 per share, meaning the company has more than enough to cover the dividend.

In fact, given the expected EPS growth in the next few years, Entergy's dividend is likely to grow assuming the utility meets its EPS growth guidance.

U.S. Treasury Yields

Entergy is affected by where U.S. Treasury yields are.

If U.S. Treasury yields go up, Entergy stock will have a headwind.

If U.S. Treasury yields go down, Entergy stock could have a tailwind.

While I don't know what will happen to U.S. Treasury yields in the near term, I personally think interest rates will normalize in the medium term as the Federal Reserve's interest rate hikes take effect.

As a result, I think this could help Entergy's valuation in the medium term.

In terms of annual EPS estimates, analysts estimate Entergy will earn $6.73 for 2023 and $7.19 for 2024, giving it a forward PE multiple of 14.59 and 13.65 for those years, respectively.

Given management guidance of $6.65-$6.85 for 2023 and $7.05-$7.35 for 2024, both of those earnings estimates are generally achievable in my view but the actual results will depend on weather and other factors that are not predictable right now.

Generally, a regulated utility with a 2024 forward PE of 13.65, investment grade debt, that's growing earnings around 6% to 8% is pretty good in most economic environments. With a dividend yield of 4.6% as of November 6, Entergy stock would be a 'Buy' assuming that U.S. Treasury yields normalize in the medium term as I think it will.

In terms of estimates, I think Entergy could achieve $8.25 per share in EPS in 2026, which is the midpoint of management guidance. By that time, assuming U.S. Treasury yields normalize, I think the stock could have a forward PE multiple of 15 or higher, giving the stock a price target of $123.75 in around two years.

For further details see:

Entergy Corporation: Adjusted EPS Growth Expected
Stock Information

Company Name: Entergy Corporation
Stock Symbol: ETR
Market: NYSE
Website: entergy.com

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