PSEG’s Long-Term Growth, Attractive Valuation Elevate It to a Top Utilities Pick

We are reaffirming our $65 per share fair value estimate for Public Service Enterprise Group PEG after incorporating updates from management’s investor presentation on March 10. We continue to believe that the company will hit the high end of management’s 5%-7% annual earnings growth target. We are maintaining our narrow moat and stable moat trend ratings for PSEG.

PSEG’s stock trades at a 10% discount to our fair value estimate as of March 15, making it one of the cheapest U.S. utilities in our coverage. Its dividend yield has climbed to 3.9% after a 6% increase in the dividend in February and a 5% drop in the stock price year to date.

We continue to forecast 7% long-term annual earnings growth as PSE&G capital investment accelerates during the next four years. Our 2023 earnings estimate is in line with management’s updated $3.40-$3.50 EPS guidance.

PSEG’s rate-regulated New Jersey utility, Public Service Enterprise Group, or PSE&G, is the primary growth driver. We forecast the utility will invest $18 billion during the next five years, at the high end of management’s most recent target range. We think management underestimates the investment opportunities in the later years of its plan. We think annual capital investment could climb to as much as $4 billion beyond 2027 as New Jersey pursues rapid clean energy and electrification policies.

Regulatory approval for PSE&G’s proposed energy efficiency and gas modernization investments this year would push total capital investment toward the top end of management’s five-year range. We expect regulators to approve only part of the request, particularly the gas distribution spending. We think PSEG will have a tough time convincing regulators that large investments in the gas system support the state’s clean energy ambitions.

We think the larger incremental investment opportunities will be in the distribution and transmission system to support offshore wind and increasing electricity demand.