Entergy Continues Steady Growth Trajectory

We are reaffirming our $118 fair value estimate for Entergy after the company reported earning $6.42 per share on an adjusted basis in 2022, up 7% from 2021, beating our expectations, and hitting the top end of management’s guidance range. We are reaffirming our narrow moat and stable moat trend ratings.

Entergy is one of the cheapest U.S. utilities in our coverage, albeit trading only 8% below our fair value estimate. We think Entergy’s combination of 4% dividend yield and our outlook for consistent 7% earnings growth represents one of the best total return opportunities in the sector. The stock’s 16 P/E is a 10% discount to the median utilities sector P/E.

Entergy’s regulated utilities remain the core growth engine. The utilities earned $8.20 per share in 2022, up 13% from 2021. Utility earnings were up 7%, in line with our core growth rate outlook, after adjusting for favorable weather that added $0.42 per share. Industrial electricity demand, which is nearly half of Entergy’s total retail sales, was up 5.3% for the year, one of the fastest growth rates in the sector.

Offsetting the utility earnings growth primarily was higher interest expense and more shares outstanding at Entergy’s corporate level, as we expected. This drag should diminish as Entergy slims its balance sheet and is able to fund most of the utilities’ investments with internal cash flow.

Our 2023 earnings estimate is at the high end of management’s $6.55-$6.85 EPS guidance range primarily due to our expectation that the parent-level drag will ease more quickly. Management reaffirmed their 6%-8% long-term annual earnings growth target based on the $16 billion capital investment plan for 2023-25 that they introduced in November, both in line with our outlook. We think Entergy could add to its capital investment plan beyond 2025 and maintain 7% growth based on its opportunities to invest in renewable energy, hydrogen, and industrial electrification.