Evergy: Attractive Valuation With Potential For Stronger Load Growth (NASDAQ:EVRG)

Evergy, Inc. (NASDAQ:EVRG) is a regulated utility that supplies electricity to over 1.6 million customers in Kansas and Missouri.

Shares of Evergy have not done well since early 2020 given the beginning of the pandemic in 2020 and interest rate headwinds since 2022.

On February 29, 2024, Evergy reported 2023 results that reflected headwinds.

Nevertheless, Evergy management is optimistic about EPS growth, rate base growth, and load growth in the future. In terms of the future, I think Evergy’s load growth could surprise to the upside, especially past 2025.

2023

For 2023, Evergy earned an adjusted EPS of $3.54, down from $3.71 in 2022 as the company faced headwinds due to increased interest expense, regulatory lag, mild weather, and lower than expected industrial load.

Given the decrease in cooling and heating degree days, management estimates full year 2023 adjusted EPS decreased $0.28.

With rising rates and higher capital investment among the factors, increased interest expense was a $0.46 per share headwind.

To help offset some of the headwinds, management reduced O&M expenses by 12%.

My take is that Evergy faced headwinds in 2023 given transient factors such as mild weather and potentially abating factors such as higher interest rates. When factoring out the weather, I calculate that the company’s adjusted EPS would have increased marginally. Given my belief that interest rates will begin to decrease this year, I think Evergy’s 2023 results are not indicative of the company’s future performance, which I expect to be stronger.

Outlook

In terms of outlook, Evergy management sees growth.

In terms of EPS, management expects EPS of $3.73-$3.93 for 2024, and they reaffirm the 4%-6% adjusted EPS CAGR target from 2023-2026 off the 2023 guidance baseline of $3.65.

In terms of the rate base, management expects growth of around 6% annualized for 2023-2028, with $12.5 billion of infrastructure investment for 2024-2028.

In terms of demand, management estimates weather normalized base demand growth of 0.5-1% CAGR and weather normalized base demand + new industrial load of 2-3% CAGR from 2023-2026.

Given management’s outlook, I expect Evergy’s dividend to grow 4%-6% annually through 2026 (with 2026 potentially being closer to the top end of 6%) given the company’s current payout ratio of around 70% is within management’s target of 60%-70% and management expects 4%-6% adjusted EPS CAGR for 2023-2026 off 2023 guidance baseline of $3.65.

In terms of its dividend, Evergy has a pretty good history, with 20 straight years of dividend growth. As of April 14, Evergy stock has a dividend yield of 5.04%, which is pretty decent.

I think management’s EPS growth guidance is reasonable given the expected increase in its rate base and given I think interest rates will begin to decline this year. Past 2025, I think Evergy could exceed 4%-6% adjusted EPS CAGR given faster than expected load growth.

Load Growth

When factoring in 2023 rate case settlements, Evergy has been able to limit cumulative rate increases in both Kansas and Missouri to around 1% since 2017. That compares to average increase in rates across the company’s region of over 11%.

With more competitive rates, there’s potential for more industrial electricity demand growth.

In particular, Evergy management estimates there are $12 billion of potential investment representing 1.3 gigawatts of potential demand evaluating the company’s Kansas and Missouri service territories.

Evergy has already had some success adding new sources of electricity demand in its service territory with some big wins that are under construction including a Panasonic EV battery manufacturing plant that’s expected to be the largest EV battery plant in the world and a Metadata center that’s expected to come online this year.

In terms of data centers, I think there’s substantial potential for growth as longer term power demand from data centers in the United States is expected to surge to over 50 gigwatts by 2030 from 21 GW in 2023 according to McKinsey. Given that McKinsey previously projected over 35 GW by 2030, I think the actual power demand consumed by data centers in the United States will be substantially higher than 50 GW by 2030.

Meanwhile, Kansas City is a fairly attractive location for data centers, as the city has competitive electricity prices and good access to renewable energy resources. Kansas also has less risk of natural disasters than many other sites, and the city’s government has supported data center construction with substantial property tax abatement.

In my view, there is more data center growth potential for Evergy beyond the announced Meta’s hyper scale data facility that occupies around 1 million square feet and costs around $800 million.

Given Meta bought other land around its $800 million data center, there is potential for the company to expand its data center in the future or to build new data centers next to its existing one.

Furthermore, there is hope that other companies will follow Meta’s example and construct data centers in the Kansas City area.

Indeed, Google in March 2024 announced it plans to build a $1 billion data center near the same area as well.

Since it takes some time to build a large data center and other big projects, electricity demand from new data centers and other big projects may not increase substantially immediately.

For Panasonic’s EV battery manufacturing plant and Meta’s data center, for instance, Evergy management estimates incremental load from the two beginning in 2024 before increasing to an expected full run-rate in 2026.

Nevertheless, I think it is important to note that management’s weather normalized base demand + new industrial load of 2-3% CAGR outlook from 2023-2026 only takes in account projects that were announced as of February 29, 2024, which was the date of the Q4 2023 earnings release.

As such, Google’s $1 billion data center isn’t reflected in the load growth projections.

Past 2025, I think Evergy’s future load growth potential is higher than 2%-3% CAGR given data center growth and given new sources of electricity demand.

Risks

Electricity demand could underwhelm in the near term given economic or weather conditions.

Regulators might not allow high enough returns on the regulated rate base that the market expects.

Evergy’s expenses could be higher than expected.

Valuation

In terms of EPS estimates, analysts on average expect Evergy to earn $3.83 in 2024, $4.04 in 2025, and $4.27 in 2026. That gives the company a forward PE ratio of 13.30 for 2024, 12.63 for 2025, and 11.94 for 2026.

When incorporating debt, Evergy has a forward EV/EBITDA ratio of 9.60 versus the sector median of 10.36 and its 5-year average of 11.19.

In terms of peer comparison, similarly sized Alliant Energy Corporation has a forward EV/EBITDA of 11.79, and Avangrid has a forward EV/EBITDA of 11.27.

Given Evergy has a lower valuation than many of its peers and also the sector median, I like the company’s valuation. I also think Evergy can meet or exceed all average earnings estimates past 2025 given I am bullish on load growth when adjusting for weather.

Although I am not as bullish on 2024 and 2025 given potential data center growth isn’t necessarily reflected as much in those years, I still think Evergy management can meet or exceed the average earnings estimates given the expected rate base increases and given I think interest rates will begin to decline this year and normalize in a year or two.

I also like how Evergy’s financing plan requires no new equity through 2026.

With that said, Evergy’s expected cash from operations from 2024-2026 of $6.6 billion doesn’t cover all of the capex plan of $6.7 billion and expected dividend payments of $1.9 billion over the same time period, resulting in the need of incremental debt.

In terms of credit, Evergy has investment grade ratings, with Evergy having a senior unsecured debt rating of ‘Baa2’ from Moody’s and ‘BBB’ from S&P Global. Meanwhile, Evergy’s subsidiaries such as Evergy Kansas Central have better ratings, with Senior Secured Debt of ‘A2’ from Moody’s and ‘A’ from S&P Global.

Given its attractive valuation and growth potential, I rate Evergy a ‘Buy’ and I would own it in a diversified portfolio along with the Magnificent Seven.

As I expect interest rates to begin to decline this year and potentially normalize in a year or two, I think Evergy’s valuation could benefit as Evergy’s dividend potentially becomes more attractive to some dividend investors.

In terms of fair value, I think Evergy should trade for a forward EV/EBITDA of the sector median of 10.36, which gives me a price target of around $59.53 per share in around a year.

I would follow electricity consumption trends, interest rates, rate cases, and earnings reports.

I think the decisions over the latter three could be catalysts.