WEC Energy: A Play On Renewables And Industrial Growth In SE Wisconsin

seekingalpha11-06

A $28B capital plan focuses on renewable energy expansion and grid reliability, supporting long-term growth in a region seeing increased industrial investment.Q3 results showed strong execution, with ...

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The company reaffirmed guidance despite regulatory challenges in Illinois and softer industrial demand.Trading at a forward P/E of 19.5, WEC still offers potential valuation expansion with an estimated EPS CAGR of 7.1% through 2026.I maintain a Buy rating with a potential price target approaching $120 by year-end 2026.   ilbusca/E+ via Getty Images  This analysis revisits WEC Energy Group (NYSE:WEC) as it moves ahead with plans to expand its renewable energy assets and modernize its grid infrastructure. Since my last article in August, WEC has delivered steady earnings and reaffirmed its now-$28B capital investment plan. This increased investment aims to scale capacity, particularly within Wisconsin’s growing industrial sector, while reducing exposure to regulatory uncertainty in Illinois. Looking toward 2025, this update evaluates WEC’s recent financial performance and its outlook for; (1) supporting earnings growth through capital investments; and (2) delivering consistent returns to shareholders. For income-focused investors, I argue WEC’s strategic direction and dividend growth record provide a solid foundation. I maintain a Buy rating, noting favorable growth prospects despite some industry headwinds. Reviewing WEC’s Business Model As a refresher, WEC operates as a regulated utility providing essential electricity and natural gas services across Wisconsin, Illinois, Michigan, and Minnesota. Serving around 4.7 million customers, it operates mainly through subsidiaries like We Energies and Wisconsin Public Service. Renewable energy expansion and infrastructure modernization are central to WEC’s operations. With a growing emphasis on carbon-free sources, its capital investments target solar, wind, and battery storage capacity, along with grid upgrades in high-demand industrial areas. These initiatives position WEC to meet rising regional energy needs while aligning with evolving regulatory and environmental standards. WEC: Carbon Reduction Plan (WEC Investor Deck (October 2024)) Investment Thesis Update WEC’s expanded $28B capital plan—an 18% increase from previous guidance—reflects a long-term growth strategy focused on three key areas:   Renewable Energy Expansion – WEC has allocated over $9B for renewable projects, targeting 2,900MW of solar, 900MW of wind, and 600MW of battery storage by 2029. This would quadruple its carbon-free capacity, enabling the company to meet regulatory incentives and growing consumer demand for clean energy. These initiatives position WEC as a competitive player in a sector increasingly concerned with decarbonization.  Grid Reliability and Infrastructure – To support economic growth in Wisconsin, WEC is directing $3.2B to transmission and distribution upgrades, primarily along the state’s I-94 corridor. This area has seen significant corporate investment, including new projects by Microsoft and Amazon, raising demand for reliable energy. These upgrades are essential for managing growth while maintaining service standards.  Capital Reallocation – WEC is shifting some investments from Illinois, where recent regulatory rulings prevented the company from recovering capital expenses through rate adjustments. The reallocation to Wisconsin, where regulatory support is stronger, should help mitigate risk and better align capital with growth opportunities.    WEC Energy: Proposed Rate Increases (WI) (WEC Investor Deck (October 2024)) These strategic initiatives support a projected EPS growth rate of 6.5% to 7% annually through 2029, making WEC attractive for income-focused investors also seeking long-term capital appreciation. Q3 2024 Results WEC reported adjusted EPS of $0.82, beating expectations by $0.12 despite a slight YoY revenue decline to $1.86B, largely due to lower natural gas prices and softer industrial demand. Residential electricity use rose by 1.3%, offsetting some industrial demand softness, and WEC reaffirmed its adjusted EPS guidance of $4.80 to $4.90 for the year. As noted above, a notable regulatory issue was the $0.06 EPS impact from disallowed capital expenditures in Illinois. Excluding the Illinois impact, WEC’s year-to-date adjusted EPS of $3.45 is on track to meet full-year guidance. Management highlighted consistent execution on growth plans, supported by favorable conditions in Wisconsin. WEC’s infrastructure investments and renewable projects remain on track, contributing to balanced growth across its service areas. Valuation and Price Target WEC is trading at a forward P/E of approximately 19.5, below its historical five-year average of 21.7. Other key valuation metrics remain favorable since my last analysis, even with an 8% increase in the share price over that period. Here is the data for WEC as of November 5, 2024:     Current 5-Year Avg Difference   P/E Non-GAAP FWD 19.5 21.7 -10%   EV/EBITDA FWD 13.0 14.2 -8.4%   Price/Book FWD 2.4 2.6 -6.4%   Price/Cash Flow FWD 9.3 10.6 -12.3%   Dividend Yield TTM 3.46% 3.09% +11.9%   Click to enlarge These figures suggest the company is trading at a discount to its historical valuation, even as revenue and earnings remain stable. Investors are paying less for WEC now than five years ago, despite the company’s growth and profitability improvements. Forward EPS estimates project steady growth through 2026:   FY EPS YoY   2024 $4.86 5.0%   2025 $5.22 7.4%   2026 $5.58 6.9%   Click to enlarge With an estimated EPS CAGR of 7.1%, there is potential for moderate valuation expansion. The average Wall Street price target is $98.34, suggesting fair value at present. Scotiabank analyst Andrew Weisel recently reiterated a price target of $103, reflecting optimism about WEC’s trajectory. If the company’s P/E multiple trends back toward its five-year average of 21.7, the FY26 share price could top $120, implying an annualized gain of around 12.5%. I maintain my Buy rating but would prefer a pullback below $90 before considering initiating a position, as I already hold a similar company in this industry. Potential Risks Here are four primary risks to the investment thesis outlined above:   Regulatory Uncertainty – Like its peers, WEC faces potential regulatory risks that can impact profitability, as shown by recent Illinois decisions. While capital has been reallocated to Wisconsin to mitigate this risk, ongoing policy changes across operating states could present challenges.  Interest Rate Sensitivity – As a capital-intensive utility, WEC is highly sensitive to interest rate movements, which impact its financing costs and dividend appeal relative to fixed-income alternatives. While we appear to have entered a rate-cutting cycle, any unexpected reversal or delay could impact WEC’s cost of capital and valuation. With much of its growth strategy reliant on debt-financed projects, stable interest rates are key to managing costs and supporting long-term returns.  Execution of Capital Plan – WEC’s $28B capital plan involves complex, large-scale infrastructure projects that are susceptible to cost overruns and supply chain delays. Effective execution is essential for the company to meet its earnings and dividend growth targets.  Challenges in Renewable Expansion – Although WEC has exclusive service territories, competition for renewable projects can impact project costs and regulatory alignment, affecting WEC’s clean energy initiatives.  Investors should review WEC’s latest 10-K filing (dated February 2024) for a more comprehensive discussion of potential risks. Summary WEC Energy Group’s expanded capital plan and Q3 results show a balanced approach to growth with stability. Investments in renewable energy and grid upgrades align with regulatory expectations and support economic development in Wisconsin. Despite some challenges in Illinois and general sensitivity to interest rates, I believe WEC’s renewed focus on Wisconsin strengthens its long-term outlook.  With an estimated EPS growth rate of 6.5% to 7% through 2029 and a solid dividend yield, WEC offers a blend of income and growth potential. Although the stock may be trading near fair value, a price target approaching $120 for FY26 seems achievable. I maintain a Buy rating and recommend looking for a pullback below $90 for a more favorable entry point.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481932600"}