Constellation Energy Group: Big Growth in EPS for 2024
Company Profile
Constellation Energy Corporation is the nation’s largest producer of carbon-free energy and provides sustainable solutions to homes, businesses, and public-sector customers across the continental United States. The company's shares trade on NASDAQ with a ticker symbol CAG.
Summary
- Constellation Energy Group experienced a substantial increase of approximately 17% in its stock value after unveiling its Q4 2023 and full-year 2023 results.
- The adjusted EBITDA surpassed expectations with a remarkable year-over-year increase of over 50%.
- Despite the earnings per share (EPS) falling 10% below analysts' projections, the company anticipates an impressive 90% surge in EPS for the year 2024.
This positive financial outlook heightens the probability of a dividend increase, complementing the ongoing share buybacks. Additionally, market multiples remain within reasonable ranges, further contributing to the favorable sentiment surrounding the firm.
Source: beatty.co
The remarkable ~28% surge in the stock price, witnessed as response of its Q4 2023 and full-year 2023 results announced on 27.02, remains striking. This stands out not only as the most significant single-day increase observed in the past year but also marks the sole instance of the stock gaining over 5% in a single day. Using this surge as a starting point, I will delve into the recent figures to evaluate the potential for further upside in CEG.
The 5 reasons why results boosted the price
There have been many interesting arguments made for the bright future of CEG, which explains investor enthusiasm on the stock. Here are five big positive takeaways from the FY23 earnings report.
1.Exceeding Targeted Adjusted EBITDA: Despite modest operating revenue growth of less than 2% in 2023, the company witnessed an impressive year-on-year (YoY) increase of over 50% in its adjusted EBITDA, reaching USD 4.02 billion. This figure surpasses the upgraded guidance range's midpoint of USD 3.8-4 billion by 3.1% and slightly exceeds even the upper end of the range. Notably, the adjusted EBITDA is notably ~30% higher than the midpoint of the initial guidance.
2. Net profits reported: The company successfully transitioned into a net profit position after experiencing losses the previous year. The reported net profit stands at USD 1.6 billion, a setback in Q4 2023 due to adjustments in fair values, rather than operational issues, led to a lower net profit figure. Excluding these adjustments, the company would have witnessed an impressive 18.3x year-on-year (YoY) increase in net income for Q4 2023. Despite this setback, the positive takeaway is that the company reported profits, and the loss in the latest quarter was not attributed to operational factors.
3. Massive rise in EPS projection on IRA support: While the results are positive, I attribute the significant increase in CEG's stock price to the projected substantial ~90% year-on-year (YoY) growth in GAAP earnings per share (EPS) for 2024. This expectation falls within the guidance range of USD 9.13-9.93. After falling short of analysts' expectations by 10% at USD 5 in 2023, the anticipated boost in numbers is primarily attributed to the Inflation Reduction Act (IRA). The IRA, which offers production tax credits, is expected to enhance revenue visibility for CEG, reaching USD 43.75 per megawatt hour. Importantly, there is no upper limit to the potential rise in revenues, contributing to the optimistic outlook for the company's earnings in the coming year.
4. Forward GAAP P/E looks good: The EPS forecasts translate to a forward price-to-earnings (P/E) ratio of 16.3x, just marginally surpassing the 15.6x for the utility sector overall, despite the current premium associated with nuclear energy stocks. Notably, there is a discernible premium on its non-GAAP P/E. If we consider the non-GAAP EPS at the midpoint of the range, the P/E ratio stands at 20.4x, contrasting with the sector average of 15.4x.
5. Sustainable Share Buybacks and Dividend Expansion: The anticipated rise in EPS is a positive indicator for dividends, which have already experienced a twofold increase in 2022. Despite the current trailing twelve months (TTM) dividend yield being modest at 0.7%, this is primarily attributed to the substantial price appreciation over the past year. For investors who purchased the stock two years ago, the yield on cost stands at a more robust 3.4%. Additionally, the company has recently declared an additional USD 1 billion for share buybacks, further contributing to the potential upward trajectory of the stock price.
Outlook for 2024
The CEG narrative has seen further enhancements since last year. The unexpected surge in adjusted EBITDA revealed in its 2023 results is just one positive development. The pivotal takeaway from the earnings report is the anticipated spike in EPS as the implementation of the IRA unfolds this year. This not only ensures revenue visibility but also establishes a potential earnings floor.
Moreover, coupled with investor gains from ongoing share buybacks, the heightened EPS projection increases the likelihood of a forthcoming dividend increase. Although CEG's forward P/E no longer appears as competitive as in the mid-2023 two key considerations are noteworthy.
Firstly, nuclear energy stocks carry a premium due to potential future growth, and in this context, the current premium, especially for the forward GAAP P/E, remains relatively modest. Secondly, considering the company's recent trend of surpassing adjusted EBITDA targets without fundamental changes in operations or the business environment, the possibility of another positive surprise looms.
Considering these elements, I would continue to favor CEG. However, if there is an extraordinary and sustained price surge or unforeseen developments in earnings, a reassessment would be necessary.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in LEU, over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Harmonic Invest's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Harmonic Invest is not a licensed securities dealer, broker or UK investment adviser or investment bank. Harmonic Invest is managed by an individual writer who is not licensed or certified by any institute or regulatory body.